All that it takes for evil to triumph is that good men do nothing.
Never was this more true than over recent years, with reference to the PPI mis-selling scandal.
Regularly the media announces larger and larger funds being repaid to clients or set aside for future payments, whilst the Financial Services industry maintains a thunderous silence.
This silence of our industry fails to tell the public that this mis-selling scandal was caused almost 100% by banks and secondary lenders, and not by Financial Advisers, and has allowed the public to become convinced that:
any form of Payment Protection Insurance is fraudulent and a waste of money
these policies never pay claims
having enjoyed the cover for several years they are then entitled to a 100% repayment of their premiums
In May 2011 the Guardian stated “Britain’s banks have been aggressively selling “ineffective and inefficient” – but highly profitable – payment protection insurance for more than a decade.” In April 2011 a court ruled that customers could claim compensation on PPI policies dating back many years. At the time, this was expected to total repayments of £4.5 billion. From January 2011 to August 2016 some £25.3 billion has been repaid, yet still the Financial Services industry remained silent.
For years Mortgage Advisers recommended a wonderful product called Mortgage Payment Protection Insurance (MPPI) and it helped tens of thousands of families keep their homes when the family income disappeared overnight through Accident, Sickness, Involuntary Redundancy, Business Closure or the breadwinner having to cease work in order to become a Carer for a close relative. The Financial Services industry continued to remain silent, and failed to bring these points to the notice of the public.
When the Banks turned PPI into the biggest commission bonanza seen for years, they rolled up five years premiums into a single premium policy. The Financial Services industry remained silent, failing to ask the questions:
“Who would ever volunteer to pre-pay five years insurance premiums?
“What possible advantage to the client comes from this prepayment?”
This action not only created an obscene amount of commission (normally as much as 75% of the single premium), it also increased the size of the loan they were making to the Client by adding this single premium to it. So, heads – the banks won, and tails – the clients lost. The Financial Services industry still managed to remain silent.
PPI sold by the Banks, often without Clients realising they were buying it, or bought by Clients because they thought it was the only way they would get the loan, became the biggest Poisoned Chalice seen in years in Financial Services. People who would never qualify to make a claim now had worthless policies, and because the first five years premiums had been added to their mortgages, would be paying for this for the next twenty-five years or even longer. Even worse than this, when claims on the policies were refused, many clients lost their homes as well. The Financial Services industry remained silent as this scandal destroyed its reputation.
As the scandal became public knowledge, no one told the public that PPI mis-selling was almost 100% caused by the banks and secondary lenders, so all Payment Protection Insurance was seen by the public as a rip-off. Having caused all this havoc the banks and secondary lenders now left the PPI market completely. Fearful of being found guilty by association, and to protect their reputation, Advisers also stopped recommending MPPI completely.
For years the proportion of complaints to FOS that involved Advisers was so low that they did not even bother to keep records of it.
In 2014 FOS confirmed that of the 500,000 complaints on all areas of financial services they had received in the previous year less than 0.5% of these related to Advisers, and of these only 40% were upheld.
Finally, in October 2016, in response to a Freedom of Information request made by DMS Security Plans, FOS confirmed that from January 1 to June 30 2016:
PPI complaints received by FOS – 91,381
How many concerned IFA’s – 92
How many were upheld against IFA’s – 21
Advisers continued to avoid this area of the market. As a direct result of neither Lenders nor Advisers discussing Mortgage Payment Protection, today:
93.7% of families with mortgages have NO Income Protection
8.8 million households could not last a week on their savings
We don’t know why the Financial Services industry remained silent and failed to speak out on this scandal, but we certainly know they did.
The Financial Ombudsman Service is now warning Advisers that if they fail to recommend protection to clients when providing them with mortgage advice, and the client later raises a complaint about that advice, it is more than likely that FOS will find in favour of the client.
In the first half of 2016 there were nine times as many complaints about PPI raised with FOS than there were about Mortgages, but Advisers had 10 times the chance of having a mortgage complaint upheld against them than a PPI complaint. In spite of this, Advisers continue to offer advice on mortgages, yet fail to advise on payment protection.
With neither lenders nor advisers offering advice in this area, large numbers of clients are seeking out information themselves with a view to purchasing cover on their own account.
Comparison websites promote the product, but almost without exception primarily compare premium costs, thus promoting buying the cheapest cover available.
No one is offering advice on buying the highest quality cover – for information go to defaqto.com and look at Short Term Income Protection.
No one is promoting policies with the highest claim payment ratio – in 2015 DMS Security Plans declined only 4.55% of all claims notified by clients.
Because of this those clients actively seeking out this cover are the people most worried about the future of their jobs and this builds massive selection against insurers into the system. It seems that only people who are fairly certain that their job is greatly at risk are prepared to take the gamble and insure against this.
Years ago it was standard practice for mortgage brokers to discuss protection with first-time buyers, offering life cover with critical illness and long term income protection, or if the latter was too expensive for the client at that stage short term income protection until they could afford to take longer term cover. We also saw offered combinations of policies, long term income protection set up with the benefit 52 weeks deferred and 12 months benefit short term income protection as well. The cost of the former was then reduced by about 50%, and the cost of the latter was less than the saving made.
We regularly see long term income protection providers reporting that they are paying in excess of 95% of all claims submitted to them, but the public don’t believe us.
We have advisers who have clients’ policies with us dating back to 1996 and over 20 years they have seen us regularly paying claims to their clients, and yet they are still not discussing income protection with their new clients.
This is the challenge for insurers active in the intermediary market, and hopefully the latest position taken by FOS on this may help.
A good first step would be for the industry to raise its head above the parapet and tell the public in no uncertain terms who caused the original problem.
An excellent second step would be for insurers to stop issuing short term income protection policies on the basis that “accident and sickness cover will not be underwritten until a claim is made”. Insurance used to be about the insurer promising to make a payment if a certain event happened and spelling out in the policy what events were covered. Surely in any other industry making a contract where a person makes payments for a number of years in the expectation that upon the happening of certain events they will receive a lump sum, and then when this happens years later the other party tells them that that event wasn’t covered, would be called fraud wouldn’t it? Why don’t insurers fully underwrite applications for short term income protection before issuing cover? Surely if a client has a Certificate of Insurance this should be evidence that they are actually insured? DMS Security plans has done this for the last 13 years.