Although about half mortgage business, and therefore potentially mortgage payment protection insuran...
Although about half mortgage business, and therefore potentially mortgage payment protection insurance (MPPI) business, is introduced by financial intermediaries, their role in selling MPPI has, to date, been largely ignored.
Research has focused on lenders. But with take-up of MPPI still relatively low, at 20% of all mortgagors, and significantly lower for mortgages introduced by intermediaries, the views of financial intermediaries on MPPI are key to the future of MPPI and safety net provision.
Moreover, given the increasing role of financial intermediaries in the mortgage market as lenders increasingly rely on introducers for business, it becomes even more important to understand what intermediaries think of MPPI.
A new independent study, undertaken by the Centre for Housing Policy at the University of York, has for the first time focused on the role of intermediaries in the MPPI market. Intermediaries were found to have a typically neutral and sometimes critical perspective on MPPI. Few were enthusiastic about the product. As a result, there must be a question as to whether the present industry take-up target of 55% by 2004 is likely to be reached. The study, funded by the Joseph Rowntree Foundation, included 19 in-depth interviews with a range of financial intermediaries.
Sold, not bought
Previous studies have shown that MPPI is sold rather than bought. In the British context, where there is no significant tradition of financial planning and poor financial literacy, many households are reliant on financial advisers for advice. However, the study found that intermediaries often provided limited choice to consumers in this area, and confirmed that differing approaches to 'selling' heavily influenced the likelihood of whether people purchased MPPI or not.
Although most people are likely to only consult one financial intermediary when buying a house, intermediaries were offering customers little or no choice of MPPI products. The majority of intermediaries were only offering one MPPI product, with the remainder offering only a small number of options. This was true of IFAs as well as the voluntarily regulated end of the market.
The lack of choice for consumers was particularly worrying, given that most intermediaries had selected MPPI products with a very limited knowledge of the MPPI market. The selection process was heavily influenced by the marketing strategies of particular companies - for example, mailshots from providers to intermediaries, or presence on a mortgage computer database, and to some extent, by the trade press and affiliation to mortgage clubs.
This was particularly true for the smaller intermediaries who did not have the resources available to them to undertake any specific research into the market. They, therefore, selected policies on the limited information available; usually the ones that appeared to represent the best value for money for the customer. Commission rates did not emerge as a major factor in selection, as most providers offer similar rates for MPPI sales.
In contrast, profit margin was an important factor in deciding which MPPI policy to select for larger companies. Here, company resources gave them the leverage to negotiate a specially branded, and often cheaper to the intermediary, 'block' MPPI policy. MPPI could represent a significant earner, particularly in light of the drying up of other income streams like endowment mortgages.
Usually, the chosen MPPI policy was selected at the organisations' headquarters: this meant that mortgage advisers had no involvement in this process and were often selling the product with no comparison to the rest of the market.
Interviewees recognised that the MPPI market was currently structured by the actions of, and for the benefit of, the larger players, particularly the lenders and insurers. These larger players appeared to favour a move towards developing block contracts, chiefly to secure an increased profitability of the product. However, without sufficient competition in the market coupled with poor consumer knowledge, these developments had the effect of reducing customer choice.
Customer take-up
A lack of customer choice, however, did not appear to influence customer take-up of MPPI. Rather, it was the way in which the intermediaries approached the sale of MPPI and their overall attitude to the product that mattered. Estimates of customer take-up of MPPI varied enormously across intermediary organisations considered, from 5% to 90%. In general, the level of take-up appeared to be highest for lenders and estate agents, and the lowest for IFAs.
All intermediaries interviewed reported that they brought MPPI to the customer's attention as required in the Mortgage Code. However, beyond this, intermediaries placed differing levels of emphasis on MPPI in the sales process. Some intermediaries appeared to recommend that MPPI should be taken out in all cases, some incorrectly believing that this was expected under the Mortgage Code. Some prioritised it in discussions, mentioning it in the first five minutes of an interview.
However, other intermediaries did not mention MPPI until the third interview and one company never mentioned it at all, relying solely on written material.
Selling techniques
Two specific ways of selling MPPI dominated. A number of advisers had recently introduced a waiver/disclaimer clause for the customer to sign if they decided not to take out a policy. This was seen as protection for the intermediary as well as a sales tool. A couple of larger intermediaries had invested quite a lot of effort into 'packaging' and 'presenting' MPPI along with other products in order to try and sell a fully protected mortgage, and in so doing, maximising sales.
However, the greatest influence on sales, and by implication take-up, appeared to be the attitude of the intermediary. Those who believed in MPPI appeared to sell more policies than those who had reservations about it. In the same way, those who did not believe it was a good product felt that this influenced their sales.
One IFA said: "I give the client the option, but as a financial adviser there are ways of doing things. When it comes to (MPPI) I do not present it that strongly, because I know that if I were the client I would say no because I think it is poor value for money."
Overall, there were varying degrees of support for MPPI among intermediaries. While some were positive, the typical response was a more considered and sometimes critical one. A number of limitations to policies were perceived: poor value for money; lack of information on claims record - making them sceptical whether insurers will pay out; not paying out soon enough; not paying out for long enough; and policies not being underwritten at the point of sale.
Moreover, a number of intermediaries pointed out the potential alternatives to MPPI, one in particular being income protection (IP). Many IFAs felt that IP offered a better product that provides long-term health insurance compared with the typical 12 months of MPPI cover. A few intermediaries argued for the use of unemployment cover and IP together. One IFA said: "A mortgage protection policy is going to cost them £30 a month, that £30 would buy an awful lot of income protection."
Future regulation
The research also raised implications for future regulation of the industry. While the response of intermediaries to the Mortgage Code was neither neutral or supportive, most advisers felt that the Code had not had a major impact on their operations. Over half of intermediaries were not aware of the Association of British Insurers' (ABI) Code of Practice for MPPI. For IFAs, unsurprisingly, statutory regulation dominated their operation. There was some support among intermediaries for the extension of statutory mortgage regulation and for one integrated regulatory system.
Present training opportunities did not address the issue of poor information on the MPPI market. There were mixed reactions to the new Certificate of Mortgage Advice and Practice. Although most were happy to undertake the training, some were more critical than others of the qualification. In-house training tended to be on an ad hoc basis; mostly it involved companies coming in to describe their products; training could therefore be based on other companies' marketing.
The Housing Green Paper reiterated the Government's commitment to a public/private approach to safety net provision for home buyers and the importance of MPPI. The industry is committed to increasing the take-up of MPPI.
However, this study shows that financial intermediaries are giving widely varying advice to customers and they continue to question the structure of the MPPI market and the cost-effectiveness of the product. There is a clear need for further improvements to MPPI if intermediaries are to be persuaded that they should sell the product. Intermediary preferences for regulated products must also be acknowledged.
Without some key changes, the research suggests that take-up for MPPI is unlikely to increase substantially. This will either delay the Government's preference to further reduce State support for mortgagors or, should State cuts go ahead while take-up remains low, place more mortgagors at risk of mortgage arrears and repossession. This development would be potentially disastrous for homeowners.
Deborah Quilgars is researcher at the Centre for Housing Policy at the University of York
