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Counting the cost of protection payments - Financial
Times article.
By Josephine Cumbo
Published: July 29 2005
Mortgage lenders are continuing to push loan payment protection insurance ,
including mortgage payment cover (MPPI), despite an on-going investigation probe
into allegations of hard selling practices and profiteering in the industry.
The Council of Mortgage Lenders, which represents the mortgage industry, argues
that payment protection insurance is a sensible way for lenders to stem the
rising tide of borrowers falling into arrears. It revealed this week that the
number of repossessions and borrowers falling into arrears had risen in the
first half of this year.
The CML forecasts that the numbers of homeowners running into repayment trouble
will would continue to rise, albeit at a low level. The body says it is also
working with the government to make mortgages more “economy proof”.
“Becoming unemployed or seeing interest rates rise should not result in an
inevitable arrears situation for borrowers,” says the CML. “Lenders remain
committed to the principles of sustainable home ownership, through encouraging
the use of relevant protection insurance and exercising forbearance as well as
through their initial lending risk assessments.”
The call by the CML comes as Yet the Financial Services Authority has
admittedsaid in over the past week that payment protection that PPI products,
often also added to loans and credit cards, had the potential to do “lots of
harm”.
Mortgage payment insurance (MPPI) insurance covers regular monthly payments in
the event of an accident, illness or unemployment. Last year nearly one in three
new mortgages had the protection sold or given free as part of the deal, but
this figure has been falling. over recent years.
The Some have criticised the cover has been criticised for providing an
inadequate safety net, partly because most policies pay out for only just 12
months and can contain many exclusions.
Payment protection insurance (PPI) for loans and credit cards has also come
under fire for hard selling practices by commission-driven advisers. It is also
often sold to people who cannot claim for events such as redundancy or being
unable to work, because they were unemployed when they were sold the policy.
Research by Moneyfacts, the independent price comparison website, found, for
example, that Profiteering has also been a concern. One recent example is
Alliance Leicester’s new Moneyback personal loan, for example, which had a best
buy interest rate of 5.7 per cent, . However, to qualify for the money-back
offer attached to the deal, the customer needs to take out the lender’s PPI
cover in order to qualify for the money- back offer attached to the deal.
Research by Moneyfacts , the independent price comparison website, found that by
buying PPI this way the borrower would pay nearly £1,500 per year extra over a
five-year period for a £10,000 loan, compared with a quote from an independent
provider, which did not add the cost on to the loan.
Concerns such as these prompted the FSA to launch an investigation probe of the
payment protection PPI industry earlier this year and it has recently been
trying to gauge how well its new rules, which are supposed to make sure
customers are not only sold appropriate cover but also that they are aware of
any significant exclusions, are being adhered to.
This week the FSA looked at completed a its mystery shopping exercise to gauge
how well the industry is adhering to its new rules, which are supposed to make
sure customers are not only sold appropriate cover but that they are also aware
of any significant exclusions.
Despite the ongoing probe, mortgage lenders defended the promotion of on MPPI,
saying it didn’t suit everybody. Lenders also insist they have a very good
claims payout record on PPI despite the “unfair press it often received”.
However, the Council of Mortgage Lenders L concedes that, in addition to MPPI,
consumers should also consider taking out other types of protection, including
income protection insurance, referred to in the industry as permanent health
insurance (PHI). However, it said it was up to lenders to decide what they would
offer clients. to their clients as part of the loan deal.
This stance, while less strict than the complete backing of MPPI that some
lenders have had adopted in the past, was described as “unfortunate” by consumer
groups, who have criticised the way the policies can be sold.
“These policies are sold like pairs of jeans or shirts in a shop,” says Laurence
Baxter, chief policy adviser at Which?, formerly the Consumers Association.
“The reason is advisers just don’t want to spend time and they are flogging
products which are not appropriate or useful.”
With the FSA yet to report its findings, others in the industry are pushing for
the tide to go out on MPPI and other forms of payment protection , largely
because there are products available out there that provide a stronger safety
net.
In a report that was released earlier this year, Munich Re, the reinsurer, said
that MPPI and critical illness insurance (CI), which pays out a lump sum if an
individual suffers a serious illness such as a heart attack or stroke, have
dominated the market for years now but have not always met customers’ needs.
“There is a clear general acceptance among both providers and distributors of
the basic fact that real consumer needs revolve around protecting people from
the consequences of long-term inability to earn an income and neither CI or MPPI
do this effectively compared to income protection,” says Will Alder, marketing
manager with Munich Re, which sponsored the report.
