Ted York explains what brokers should be doing to conform to new regulations on selling income protection policies

With the introduction of statutory regulation of the general insurance markets new obligations were introduced to brokers operating in those sectors - consumer protection and treating customers fairly.

Anyone selling general insurance products needs to ensure that the product sold meets the customer's requirements. Moreover, the broker needs to offer 'best advice' . And best advice must surely include an obligation to sell them a product that will ensure they keep the roof over their head should the worst happen and they find themselves unable to meet the mortgage repayments through accident, sickness or unemployment.

Traditionally this type of policy has been mainly sold by high street lenders, of course. They have targeted protection policies as a means of recouping some of the cash they lost by offering low rates (APRs) and cut price products. Some continue to charge anything up to nearly five times more for the product than specialist insurers and brokers.

Hard sell
Payment protection insurance earns significant profits for the provider and commissions for agents. So it is often given the hard sell and, subsequently, mis-sold.

Many policies for instance are useless for the self-employed, as they cover only redundancy when they ought to cover cessation of trade as a minimum.

Some borrowers are not even aware that an mortgage payment protection insurance (MPPI) policy has been included in the mortgage.

Sometimes it is not only the high prices that the high street lenders are guilty of, but the quality of the cover they are selling is also often grossly inferior.

For example some lenders' payment protection only pay out after a 60-day excess period, whereas independent cover sold through intermediaries can offer back-to-day-one cover.

With the new regulations now in place, brokers should be asking their customers whether or not they have MPPI in place - especially given the rise in repossessions recently.

If the customer has a policy in place which might be designed to suit the needs of the lender and not the borrower, then the broker should advise them to choose to a more suitable policy which allows transfer without an initial high excess period.

The broker should then search the market on the client's behalf before recommending a suitable accident, sickness and unemployment (ASU) product for the client. The best way to do this is use the online comparison systems.

Having a suitable MPPI policy in place underpins your clients' financial health. By neglecting to supply or direct a client to the most suitable product in the market, could lead you to be in breach of the FSA's Treating Customers Fairly initiative, and that could have financial implications for the business at a later date.

It is no longer easy to pass the buck and argue that the lender, and its in-house product, is fulfilling the borrower's needs in this department. Since some of these products are inferior to those available on the open market, how does that figure when it comes to general insurance regulations and best advice?

Should you have a client that has a mortgage and no MPPI cover in place, then as their broker you have a duty to make your clients aware of the problems they could face without protection, and to then direct them to the most suitable product in the market.

This kind of cover will become more crucial as the government is forced to rein back on public spending and to target a reduction in unemployment benefits.

A possible change to the benefits' system should be explained clearly to the borrower, linking it with the importance of taking out ASU cover.

However, it is vital for the intermediary that arranges cover that the product selected is "best" for the client in terms of price and cover. If it is not, then they will run the risk of falling foul of the regulator's rules on treating customers fairly and, given the increasingly litigious times that we find ourselves in, that could prove very costly indeed.

It is important given the current environment surrounding payment protection insurance and the recent announcement by the FSA that it is to review the regulations surrounding general insurance that brokers transparently show they are treating their customers fairly.

Difficult sale
At present, the individual income protection (IP) market is becalmed, stifled by a lack of innovation from product providers and unwillingness by brokers to recommend it to clients. Its cost and complexity also make it a difficult sale for intermediaries.

The various definitions of incapacity,

ranging from the sought after option, 'own occupation', to 'activities of daily work', are just too confusing.

This points towards individual IP remaining very much a niche market. Meanwhile, there remains a great need for borrowers to have protection in case of accident, sickness or unemployment.

For many clients, other than the self-employed, recommending an MPPI policy will be the best way to fulfil that need.

A review by the FSA may cause some discomfort to those operating within the industry but the outlook for the majority of house buyers looks much more rosy.

Thanks to the introduction of age-banded premiums, younger borrowers especially will get a much better deal when they sign up to an ASU policy and there are other initiatives on the way - watch this space. IT

' Ted York is with ME Berkeley Alexander Insurance Services

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