Mortgage lenders are continuing to push loan payment protection insurance
despite an on-going investigation into allegations of hard selling 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 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.”
Yet the Financial Services Authority has said in the past week that payment protection products, often also added to loans and credit cards, had the potential to do “lots of harm”.
Mortgage payment protection insurance (MPPI) 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.
The cover has been criticised for providing an inadequate safety net, partly because most policies pay out for only 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 with Alliance & Leicester’s new Moneyback personal loan, which had a best buy interest rate of 5.7 per cent, the customer needs to take out the lender’s PPI cover in order to qualify for the money-back offer attached to the deal.
Moneyfacts found that by buying PPI this way the borrower would pay nearly £1,500 a 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 of the payment protection industry earlier this year and it has recently been trying to gauge how well new rules are being adhered to. These are supposed to make sure customers are not only sold appropriate cover but also that they are aware of any significant exclusions.
Despite the ongoing probe, mortgage lenders defended the promotion of MPPI, saying it didn’t suit everybody. Lenders also insist they have a good claims payout record on PPI despite the “unfair press it often received”.
However, the Council of Mortgage Lenders concedes that, in addition to MPPI, consumers should also consider taking out other types of protection, including income protection insurance, referred to as permanent health insurance (PHI).
This stance, while less strict than the complete backing of MPPI that some lenders have 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 other forms of payment protection 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 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.
© Gigaware™ Ltd 2005