Case Example - MPPI

Current practice

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.

‘TCF Problem’

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

• In many cases the consultant had failed to provide a full record of the customer’s demands and needs – in particular details of existing insurance policies the customer already had in place. Without this, Senior Management realise that they aren’t able to evidence to the FSA that the sale of MPPI was suitable.
• The files reveal that some customers have been sold a policy which would only allow them to claim in restricted circumstances – or in some cases where no proportionate refund was available if they cancelled outside the statutory cancellation period. In many cases there are no clear records to demonstrate that the customer understood these limitations or to suggest that these were drawn to their attention.
• In addition there was no explicit record stating why the consultant thought the MPPI policy was suitable for the client even though some of their demands or needs weren’t met by the contract.

Affordability questionable in some cases

• In situations where a monthly premium policy had been sold, evidence suggested that the extra cost of the MPPI monthly premiums appeared to be putting a heavy financial burden on the customer when coupled with the mortgage payments. In these cases cost/affordability wasn’t addressed in the needs statement: suitability of the MPPI product was therefore questionable – especially given that the customer already had a credit impaired history.

Inappropriate sales of single premium policies

• The files showed that a small number of customers had been sold single premium policies when it would appear that a monthly premium policy (also available) may have been more suitable. This was of concern where the customer might realistically be expected to remortgage to a non-specialist mortgage before the end of the single premium policy cover.
• At the same time, whilst information showing the total cost of the single premium option had been disclosed and broken out as required under FSA rules, it was clear in hindsight that this information (which was buried in a paragraph of text) was hard to pick out as presented. To this extent it was likely to fail the ‘clear, fair and not misleading’ test (Principle 7 and ICOBS 2.2) as well as TCF.

‘Opt out’ option problematic or unclear

• Disclosure records showed that, when recommending MPPI, certain sales consultants only ever sent one KFI which combined the overall cost of the mortgage and MPPI – thus if the customer were to decide against taking the MPPI they would need a revised KFI before the mortgage could proceed.
• The compliance department felt that this could result in someone opting for MPPI to avoid delays and/or without properly considering the effect of the additional monthly costs. They also felt that it could lead the customer to believe that the product wasn’t optional even if this fact was stated in Section 9 of the KFI. All of these points compromised TCF.

Inappropriate inducements and sales targets

• Sales staff received a monetary bonus for each MPPI product sold and targets were set at 60 per cent penetration. The result of the bonus programme meant that staff could significantly increase their basic salary if targets were met. The targets were also set in relation to volume and not customer need, and there was no claw back from the salesperson if the customer subsequently cancelled their policy.

‘TCF solution’

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:

• existing insurance cover (including any benefits provided through work)
• employed/self employed status – including start date
• expected retirement/redundancy/cessation of self-employment
• age
• residency
• previous/existing medical conditions
• intentions to remortgage/move/retire (ie the need for flexibility)
• anything else that might limit the customer’s eligibility to claim under a policy or require them to cancel the policy early

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:

• confirmation that the customer is receiving an advised service
• confirmation that the MPPI is optional
• the fact that non-uptake of optional MPPI won’t affect eligibility for the loan
• how long the cover lasts
• what money they get back if they cancel early
• what the main or any unusual exclusions are and where to find them in the product literature
• total cost if the premium is added to the loan and confirmation that the policy will be paid for over the term for the loan

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:

• a Yes/No list of the most common customer demands (this may also alert customers to ‘demands’ they may not have thought of)
• a free form option to add any other ‘demands’ of relevance
• a confirmation statement that the demands identified were read back to the customer who confirmed that they had all been captured
• a Yes/No list of the most common customer needs
• a specific needs statement in relation to cost/affordability
• a supplementary free form option to record additional needs
• a space in which the consultant must list all of the demands and needs not met by the contract being recommended
• confirmation statement that a personal recommendation has been made
• a ‘reasons for recommendation’ section in which the consultant must explain free form why the recommendation is suitable given its costs and any exclusions and limitations of the contract

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:

• file fails (no record that the eligibility questions had been asked, an incomplete ‘Need to know’ statement, and/or two KFIs not issued when MPPI sold)
• cancellations and complaints in relation to MPPI sales by individual consultant
• penetration rates

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.