Will PPI alternatives see history repeated?
The problems with payment protection insurance have pushed providers towards alternatives but history could be about to repeat itself with the FSA and the Office of Fair Trading releasing a consultation paper on alternative PPI products earlier this month.
FSA managing director Margaret Cole said: “We are aware that some firms have developed new forms of protection that aim to meet similar consumer needs to PPI. These may, however, pose similar risks to consumer and the previous failings identified with PPI must not be repeated.”
Four main areas are identified as concerns:
- the policies may not meet customers’ real needs;
- payouts may not be sufficient
- firms are not properly identifying beneficiaries of alternative PPI
- policies may be too complex for customers to compare.
All these issues bear more than a passing resemblance to those raised with PPI. “There is definitely potential for alternative PPI to have the same effects as PPI,” says Highclere Financial Services director Alan Lakey.
The alternative PPI market has grown this year. Both Aviva and Nationwide launched short-term income protection products to move into the gap left by companies such as Lloyds, which stopped offering traditional PPI in May following the British Bankers’ Association’s defeat in the High Court.
Lifesearch senior policy adviser Matt Morris believes this was not necessarily a negative development. “The BBA defeat is a good thing if it pushes providers towards replacing PPI with more worthwhile products but the products were not the problem before - it was the selling practices. Alternative products are open to abuse, but far less so than PPI,” he says.
Aviva also does not believe alternative PPI bears any similarity with the original products. A spokesperson says: “Our shortterm income protection product has built on the lessons learned from PPI misselling. We have been heavily engaged with the FSA during the development of their approach to regulating alternatives.”
The Association of British Insurers agrees. “Lessons have been learned and sales standards are now significantly higher and more rigorously monitored. The FSA has made clear that all providers must have in place processes to ensure products reach the right customers, which reduces the risk of misselling,” says a spokesperson.
But Lakey says alternative PPI products not only have the potential to be missold, but are also fundamentally flawed. “There is the capability for banks to carry on doing bad things in the area of alternative PPI because of the way they are geared up to sell,” he says.
“But alternative PPI is also a cruddy product. If I have a client who wants cover for when they cannot pay their bills, the last thing I am going to do is pull out a PPI plan.
“What is the point of cover that only runs for two years? You need a plan that will cover you until you would have retired. I would never sell any kind of PPI because it is never relevant,” Lakey continues. “It is also more expensive than traditional protection. A client came to me and said he had just taken out PPI with RBS at a cost of £131 a month. I arranged a plan containing the same cover - IP, CI and life - for less than a quarter of that. The price you pay for it being short-term is not worth it.”
However, Morris says: “Genuine short-term IP does not pay out for as long as full-term IP but is worth having. If everyone had their PPI policy replaced with this, the state of the nation’s protection would be much better.”
Morris thinks alternative PPI also differs from traditional PPI in terms of benefiting rather than harming advisers. “With the welfare state in retreat, a quality IP product is more important than ever - the IFA just has to make the effort,” he says. The ABI agrees that short-term IP offers more opportunities for advisers. “Alternative income protection products are linked to loans, so these would only offer opportunities for advisers who arrange the loan,” says a spokesperson.
Lakey is unsure about the potential that alternative PPI unlocks for advisers. “It is good in a sense, as the more products we have at our disposal, the more we can assess what is best for the client,” he says. But he does not think a wider range of alternative products will shake PPI’s reputation. “When I say to a client, I have a plan for you in the event of your ill health, they say, ’Not that PPI.’ The phrase PPI, alternative or not, is tainted,” he says.
Fundamental problems with alternative PPI aside, the industry appears to be united on one issue - that an FSA consultation will have little impact on eliminating misselling. “Probably not a lot will come out when the consultation closes next January,” says Morris. “I would like to see them coerce sellers of alternative PPI to discuss full IP during client conversations.”
Lakey also thinks the FSA may be taking the wrong approach. “Every FSA consultation has been a sham. They ask for industry contributions, then do the opposite. Just saying that alternative PPI could be dangerous is not enough,” he says.
“It irritates me that the FSA has a number of mechanisms at its disposal to assess the type of business people are doing. If they had done their due diligence on the banks seven years ago in the same way they would with an IFA, we would not have had the PPI scandal,” Lakey continues.
FSA involvement is equally unwelcome for the ABI. “Regulators should not get involved in product design,” says its spokesperson. “We believe the FSA should focus on ensuring firms have satisfactory product governance processes in place to ensure new products are distributed to meet the needs of the target market fairly.”
Morris agrees that stricter regulation of processes rather than products is key, saying: “Rather than destroy the product, it would be better for the FSA to focus on stopping banks and mortgage lenders flogging alternative PPI to every uninformed customer.”
But Lakey does not think even this approach would prevent alternative PPI from being missold in the same way as its predecessor.
He says: “You can have as many rules as you like. Society says you will not kill or you will not steal but it still goes on. People will find a way round rules and keep going until they get caught.”