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The exclusion zone

The Office of Fair Trading is looking for a crackdown on payment protection insurance and is being backed by many IFAs who are angry that the banks are getting away with selling poor products that do not pay out. Helen Pow reports.

The Office of Fair Trading referred the UK payment protection insurance market to the Competition Commission for investigation last week.

The OFT claimed that PPI sellers are restricting competition and giving many policyholders a poor deal.

Many IFAs believe this action could force banks and mortgage lenders to stop misselling the product.

OFT chief executive John Fingleton says: “There are features of this market which restrict competition to the detriment of consumers.

“Despite some evidence of a degree of consumer satisfaction with aspects of the product, the evidence as a whole suggests that consumers get a poor deal.”

Lifesearch head of protection Kevin Carr welcomes the move. He says: “The majority of people selling PPI have been putting profitability above suitability for a long time because these products, being one price fits all and normally sold without advice, are so simple to sell, yet so profitable.”

Consumer group Which? says PPI policies tend to be full of exclusions which are rarely explained to clients so many policies will not pay out. Even when a claim is paid, the benefit is often little more than the premiums paid for the cover.

Which? personal finance campaigner Paula Houghton describes the PPI industry as “systematically dysfunctional”.

She says: “The OFT’s decision confirms Which?’s view that expensive PPI products, often not fit for purpose, are being consistently missold.”

BritishInsurance.com managing director Simon Burgess agrees that PPI products are often “a major rip-off”. He says: “There are some good guys but most PPI providers are selling products that will not pay out. Many banks tell their customers they will not qualify for a loan unless they take out PPI.”

IFAs cite income protection insurance as a much better alternative to PPI because policies are sold based on personal circumstances so if clients disclose all health problems the policy should pay out. This also means that, for a healthy person in certain occupations, such as most office jobs, policies are better value.

Most IP policies run until retirement and a client can choose different deferred periods to reduce premiums.

Advisers are angered that many banks and mortgage lenders will not even mention income protection insurance as an alternative to PPI, even when a firm sells both products.

However, Halifax claims the OFT’s criticism is unfair. Spokeswoman Donna Stacey says: “PPI is a valuable product benefiting consumers by helping to protect themselves against financial risks arising from unforeseen circumstances which could result in arrears or insolvency. The price for insurance is always quoted separately to the loan price during the sales process. The insurance is not compulsory and customers are free to shop around.”

The Association of Mortgage Intermediaries is also unimpressed by the OFT’s decision. Associate director Rob Griffiths believes mortgage payment protection insurance should be exempt from further investigation by the Competition Commission.

He says: “We are very disappointed that the OFT has not taken on board the strong case that the AMI made for excluding mortgage payment protection insurance from referral to the Competition Commission. In its market study, the OFT called MPPI ‘something of a special case within the PPI sector’.

“Our belief is that the robust MPPI sales processes which have been adopted by mortgage intermediaries, separates MPPI from other PPI markets and we are disappointed the OFT has failed to recognise this.”

But Hargreaves Lansdown head of research Jon Briggs does not agree that MPPI should be exempt and he believes the product is “just as lousy and useless” as ordinary PPI.

He says: “MPPI is still very pricey and is missold by many brokers. It is no more useful than PPI and much less useful than long-term protection products such as income protection.”

But Carr believes PPI should not be scrapped because if a customer cannot get income protection, it may still be an option.

Which? says MPPI may be a cheaper alternative for older people, those with poor health or who work in hazardous occupations because policies are not individually underwritten.

But, like PPI for credit cards and loans, plans are usually riddled with exclusions, so it is worth looking around for a budget IP policy.

The FSA recently fined GE Capital Bank £610,000 for failing to have adequate systems and controls for selling PPI and for failing to treat customers fairly.

Carr believes the regulator needs to do more to stop misselling. He says: “There needs to be more fines from the FSA and potentially bigger ones than we have currently seen. Companies such as GE Capital Bank make about £1m a day from selling PPI, so a £610,000 fine will not mean much to it.”

Burgess points out: “GE is worth £250bn, so to fine it £610,000 is neither here nor there.”

Briggs believes the FSA should make companies found guilty of misselling compensate customers instead of paying fines which only line the FSA’s pockets.

He says: “Rather than fining companies, if consumers have been hard done by, they should be compensated by a reduced premium and maybe a backdated reduced premium as well.”

IFAs are hoping the OFT’s referral will prompt banks and mortgage lenders to act more responsibly.

Briggs says companies might start to improve their practices and may reduce premiums but he is sceptical that the industry’s reputation will improve.

He says: “The OFT’s referral will just highlight again the problems in the industry. People still put PPI, IP and all insurance products under one umbrella so I do not think the industry’s reputation will improve.”

Burgess believes if banks and mortgage lenders get their act together and start selling PPI responsibly, it will open up the market to IFAs.

He says: “It is about time that IFAs were given access to these clients. There are massive earning opportunities. The PPI market is worth £5bn commission a year in the UK so IFAs need to go in and grab their share.”

But Briggs is baffled as to why any IFA would want to sell PPI. He believes that an adviser could not sell such an inferior product and claim to be treating customers fairly.

He says: “To do a good job as an IFA you need to look at the long term. I do not think short-term cover such as PPI is responsible, in fact, it is a lousy and useless product.”

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