Case Example - MPPI
A medium sized mortgage broker with 20 consultants, specialising in the sale of mortgages to customers with a poor credit history.
All of the consultants offer advised sales of mortgages and – where relevant – advised sales of MPPI. Both single premium and monthly premium polices are available. Sales take place through a combination of ‘telephone only’ or face to face sales.
The monthly management information (MI) statistics show a fairly consistent MPPI uptake of 70 per cent. However, the Senior Management at the firm are concerned following publicity from the FSA that this rate of penetration may be artificially high.
They are also aware that if customers are not being advised appropriately the firm will be leaving itself open to enforcement action from the FSA. (Relevant FSA principles here are Principle 6; having due regard to customers’ interests and treating them fairly; Principle 7 - communicating to customers in a way that is clear, fair and not misleading and Principle 3 – a firm taking reasonable care to organise and control its affairs responsibly, effectively and with adequate risk management systems.)
As part of the firm’s continual approach to embed TCF into the culture of the business, Senior Management ask for a spot check of files by the compliance department and a report back - to include recommendations on how better to assess MPPI sales.
Policies and procedures governing the sale of MPPI under FSA regulation were implemented in time for insurance day (14 January 2005) but failure to adequately monitor compliance with these, coupled with subsequent changes to the sales process since implementation, has resulted in the firm failing to ensure that the sale of MPPI is appropriate. The firm therefore cannot demonstrate that it has treated its customers fairly. This is revealed by the files as follows:
Insufficient records to evidence suitability of MPPI
Affordability questionable in some cases
Inappropriate sales of single premium policies
‘Opt out’ option problematic or unclear
Inappropriate inducements and sales targets
There are a number of simple steps the firm could take to ensure fair treatment of customers during the sales process:
1 – Introduce prescribed eligibility check questions and link these to performance targets
To ensure that consultants gather and record sufficient information to support any eventual MPPI recommendation, the firm could introduce mandatory ‘eligibility’ questions to which the reply must be recorded on paper. These could be asked over the telephone, face to face or (if neither applies) form part of the application form. Questions would need to include both ‘Yes/No’ and open ended questions and would cover:
Completion of every section of the eligibility check could be linked to overall performance monitoring and incentives.
2 – Introduce ‘Need to know’ statements that must be confirmed as made during the sales conversation
These to cover:
The consultant could be required to tick a box against each statement to confirm that the discussion took place.
3 – Create a prescribed format for the ‘Statement of demands and needs’
Introduce a mandatory format for the ‘Statement of demands and needs’ and make its completion a requirement which is linked to performance monitoring.
This could consist of a series Yes/No statements (one or other to be encircled) plus free form questions, made up of:
This record of suitability, which must be kept for regulatory purposes, will give a clear picture of why the customer needs MPPI and why the policy in question is being recommended.
4 – Disclosure
The firm could introduce procedures that make it mandatory to issue two separate KFI/cost illustrations – one including and one excluding MPPI (unless the customer has already said they don’t want MPPI).
5 – MPPI MI
Regular MI could be set up (of which consultants would be made aware) to record:
This would enable sales managers to identify training needs and Senior Management to monitor quality as well as quantity of MPPI sales. This in turn will help them to determine whether customers are being treated fairly
6 – Monitoring, training and incentives
Going forward management could take a risk-based approach to staff monitoring, requiring 100 per cent file checks on all new advisers until they are satisfied with competency.
Recording MPPI sales telephone conversations could act as further evidence to demonstrate that the appropriate sale of MPPI took place.
Any consultant with consistent file fails could be required to attend refresher workshops and tests on FSA rules for selling PPI. In addition, the right to sell MPPI without supervision could be withdrawn until they satisfactorily complete the refresher course and a given number of supervised sales.
Finally, quality of record keeping at point of sale (whether or not a sale is made) and persistency of MPPI sales could be rewarded, with cancellations resulting in a commission clawback from the adviser.
FSA related links