PPI: Evidencing prudent risk conduct
Alexander Burgess is a director of British Money
The Payment Protection Insurance mis-selling scandal created a protection gap of unprecedented levels – greatly increasing the number of delinquent loans lenders hold within their portfolios, exposing them to future FCA scrutiny and possible fines for ‘irresponsible’ lending.
In a bid to mitigate the risk of bad debt and subsequent delinquent loan numbers, in January 2014 British Money developed a post-PPI, delinquency protection product for lenders. The firm brought the product to market after negotiating terms and conditions with A-rated insurer, Cigna Insurance Services, who are currently in partnership many blue chip UK household name organisations, who have decided to put their trust in Cigna to serve their customers and protect their brands across multiple industry sectors.
Such was Cigna’s confidence in the proposition, it offered British Money a five-year exclusive distribution deal and agreed to run the scheme under guidance from the protection specialist. A world-leading insurer taking responsibility for the entire sales, administration and claims process and so removing the regulatory, financial and reputational risks associated with the sale of PPI is a tempting proposition. As too is confirmation lenders can fulfil their risk and governance controls, demonstrate they treat customers fairly, enhance their customer service and rebuild the reputation of PPI.
This is an innovative and bold approach, offering a perfect solution for lenders who are reticent to sell PPI because it has damaged both their brand and profit margins, and is in stark contrast to the restricted number of delinquency protection offers currently available to lenders.
No other insurance provider offers such a compelling proposition; a feature and benefit-rich solution, whole process control and the provision of a conduct risk reporting protocol. Known as the Conduct Risk Dashboard (CRD), the protocol outlines a series of controls and measures with monthly, quarterly and annual activities which Cigna undertakes on behalf of the lender partner.
Each CRD is bespoke to each lender, evidencing a mutual commitment to treating customers fairly and showing how lenders stress test against changes to customers’ circumstances as well as interest rate rises.
This not only goes beyond MMR guidelines, ensuring lenders meet the FCA’s objective to ‘secure an appropriate degree of protection for consumers’, but prepares ahead to meet future FCA calls for greater affordability scrutiny, which it has hinted at.
Earlier this year, Treasury Select Committee member Andrew Love MP reported only 5% of mortgages and loans are sold with protection against the risks of accident, sickness or unemployment. In January 2014, British Money commissioned online market research firm, Usurv, to identify how many first time buyers and existing borrowers have protection plans in place. Feedback was 2.7% and 5.4% respectively.
Further investigation revealed 46% failed to purchase cover because it wasn’t offered by their lender, confirming British Money’s belief that the regulatory, financial and reputational risks outweigh any desire to reduce potential delinquent loan holdings. State protection was cited by 27% who failed to buy cover and a tarnished reputation of PPI by 24%.
Ironically, a second survey suggested lenders who do not discuss, offer any form of protection or obtain an acceptable disclaimer could leave themselves exposed to a second wave of PPI mis-selling claims from customers saying they failed to act prudently or protect their financial well-being.
Council for Mortgage Lender statistics showing Q1 2014 mortgage arrears and repossessions at 138,200 and 6,400 suggest lenders’ debt management strategies are working. However British Money says a growing number of people on the brink of financial collapse are not on their radar. In June 2014, Usurv questioned 1000 respondents “Would you be in severe financial trouble if you did not receive next month’s pay cheque?” 52% said yes. People from all age ranges, income levels and locations reported they were close to a monetary meltdown.
British Money calls these people the ‘hidden statistics’; customers who have so far avoided appearing on the CML’s spreadsheet, but who have the potential to become a delinquent loan.
The Basel III Accord requires lenders to carry capital commensurate with delinquent loan levels; those with poorly performing books are required to hold more capital than those who do not.
A five-star Defaqto-rated income protection insurance policy ‘white-labelled’ for lenders. It offers; three months free cover for all customers, no excess or exclusion period, non-discriminatory premiums (age, occupation, smoking habits and medical history no longer factored in), acceptance of claims following the onset of a wide range of conditions including Alzheimer’s, Cancer, stress and backache, cover for those in permanent employment, the self-employed and contract workers and a policy structure so the majority of premiums are used to pay claims, creating higher confidence in pay-outs. Moreover, Cigna are prepared to sell it on behalf of lenders and most importantly to take full responsibility for the entire sales process and the associated risks.
Implementing this solution will; mitigate the risk of bad debt reducing delinquent loan numbers, lessen the likelihood of future FCA scrutiny and ‘irresponsible’ lending fines, go beyond MMR ‘checking affordability’ requirements, ameliorate the protection gap, demonstrate TCF (via CRD protocols and offer of three months’ free cover with an option to decline or extend), meet Basel III requirements, provide securitisation benefits under the European Banking Authority’s new regulatory Technical Standards procedures and create an additional risk-free revenue stream (if lenders choose to take commission).
Crucially lenders are absolved of any regulatory, financial and reputational risks as the proposition is supported by a major financial institution managing all sales, administration and claims. It’s also been developed by a business that due to its robust controls, has never received a justified mis-selling complaint and are acknowledged consumer champions.
In its 2013/2014 Business Plan the FCA says a key risk is that ‘firms do not design products or services that respond to real consumer needs or that are in consumers’ long-term interests’. British Money and Cigna agree with the sentiment but believe its deeds, not words that count and have created a solution that will justifiably rehabilitate the tarnished reputation of PPI.