In January the FSA and OFT issued joint guidance on payment protection products. This is essential reading for IFAs selling protection products - especially those in the mortgage market.
It is a very technical document and that results in some classic ‘wood for trees’ issues. Besides short-term IP it covers debt waiver products. Rather than paying the customer an income, these products waive interest and/or charges when someone is too ill to work or unemployed. Part of the existing debt may also be waived.
It is important to note that these products are in addition to any forbearance etc that a creditor may offer on a discretionary basis when a person has financial difficulties. As this is a new market – with one entrant at the time of writing – it deserves particular attention.
The guidance identifies some specific risks associated with debt waiver. First, what if these policies include maximum benefit levels such that customers still have to make some payments towards the loan themselves? This is similar to the problems that can happen with IP when an overall cap on benefits means they do not get the income they expected.
I am strongly in favour of financial underwriting at the point of IP application. The effect of this is that a customer knows exactly how much income replacement they will get if they need to claim.
For debt waiver you must go further. No customer will understand it if they do not get their mortgage paid under one of these policies because of an underwriting decision at the point of claim.
As such the FSA/OFT guidance should have stated such products must meet all payments on the loan. Instead they say “providers will need to reflect on this and align their target market’s net income levels and benefit cap appropriately”. A serious missed opportunity.
If you combine benefit caps with deferred periods, duration of benefits and a target market of low-income people with few savings you are in for even more serious problems.
To be fair the guidance does draw attention to this accumulation of detriments but it does not come to any conclusions other than ‘provider beware’. In line with the debate on simple products, they could have nipped such issues in the bud.
Moving to consumer choice, point-of-sale prohibition and single-premium policies the Competition Commission has already made the situation clear on PPI.
For debt waiver the guidance focuses on barriers to exit or switching when consumers cannot cancel the policy unless they cancel the loan (because the cost is included in the APR).
In this case the cost to the consumer of cancelling the policy could be an early repayment charge plus a new mortgage product fee. Hopefully the guidance will eliminate this risk.
Finally, the technical question – is debt waiver an insurance? I will not go into detail here but the guidance indicates probably not. That said, the new entrant is an insurance company.
From a non-technical (consumer) perspective, debt waiver will be seen as insurance and is in direct competition with new short-term IP products. I have no problem with this so long as the relative benefits (and detriments) of each product are clearly explained together with the likely costs.
That way, consumers can make an informed choice about how they wish to protect themselves. Sadly, the guidance does not make this leap from the technical issues to the broader market perspective.
Richard Walsh is a director and fellow of SAMI Consulting, www.samiconsulting.co.uk
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