The availability of mortgages at all levels is essential to kick-start the failing housing market and the industries that rely upon this, from construction to those selling white goods or home insurance. Without readily available and free flowing capital, the UK economy will self implode.
However it now appears that the ‘not so ready to lend’ lenders, principally the banks and building societies who caused the mess in the first place, are now restricting the capital flow further with the provision of ‘new’ products designed to protect their capital and circumvent the recent legislation outlawing the selling of PPI (Payment protection insurance) at point of sale of the loan or mortgage.
Fortunately both the FSA and consumer watchdog , the OFT (Office of Fair Trading) have been keeping a close eye on these activities and have today issued a joint statement warning the providers of these products to obey the rules or face the consequences. Both UK Government organisations are determined that another PPI mis-selling scandal should be avoided as new mortgage protection products emerge.
The two quangos have joined forces on proposed guidelines to lenders in relation to new PPI type products, the responsibility for which can fall within either regulator’s area of operations.
The statement emphasises that now is a key time to reinforce the regulations as the insurance market shifts away from PPI and providers begin to develop new products or product features.
Under particular scrutiny are short-term income protection marketed as debt freeze or debt waiver when included with a credit or loan agreement or mortgage.
Some of the payment protection products that the FSA and OFT considered during the preparation of this proposed guidance are:
Insurance. This includes short term income protection or ‘STIP’, an insurance contract which provides a pre-agreed amount to the policy holder if they experience involuntary redundancy or are incapacitated through sickness or as a result of an accident and may be combined with other forms of insurance cover or include other benefits, and which:
o has a maximum time-limited benefit duration;
o is written for a term which is less than 5 years and not predetermined by the term of any credit agreement or RMC; and
o can be terminated by the Insurer.
Non Insurance the creditor agrees to freeze or waive the requirement on a consumer to make periodic repayments, or to freeze or waive interest or other charges, when a specified ‘event’ occurs, such as sickness or unemployment.
Insurance products are regulated by the FSA under the Financial Services and Markets Act 2000 (FSMA). Non-insurance protection linked to a regulated first charge mortgage contract are also regulated by the FSA. Non-insurance protection linked to a credit or hire agreement (including a second charge mortgage) will typically be regulated by the OFT under the Consumer Credit Act 1974 (CCA).
The two organisations will continue to monitor developments in the market, and will take appropriate action under their respective powers where products or practices risk causing detriment to consumers.
The FSA’s guidance stresses that firms should ensure that product features reflect the needs of the consumers they are targeting.
Margaret Cole, FSA managing director, said: “This is the first time that the FSA has issued guidance on the design of a specific product. Firms must learn the lessons of the past and make sure they have consumers’ needs at the heart of new product development.
“That is why we are acting early to ensure firms understand the risks they should bear in mind when designing these products, and how they can manage these risks when developing or distributing the product.
“The FSA cited new forms of payment protection products as an emerging risk in its Retail Conduct Risk Outlook earlier this year, and we are following up on that warning.”
The OFT’s guidance sets out how the OFT considers the Consumer Credit Act applies to payment protection products such as debt freeze or debt waivers linked to a regulated credit agreement, and what firms can do to ensure compliance.
In particular, firms should ensure that consumers are absolutely clear about the nature, price and implications of payment protection products.
For example, if an agreement is offered with an option to choose debt waiver terms, on payment of a fee, it may be necessary to provide financial information including and excluding the cost of the debt waiver.
The guidance also sets out examples of business practices in relation to payment protection products which the OFT is likely to regard as unfair or improper (whether unlawful or not) and so may cast doubt on fitness to hold a consumer credit licence.
David Fisher, the OFT’s Director of Consumer Credit, said: “It is important that the problems encountered with mis-selling of PPI do not arise in relation to new payment protection products.
“Firms need to ensure that they comply with relevant legislation and do not engage in unfair or improper business practices. In particular, they should make clear to consumers what they are signing up to and how much it costs, so that they can make properly informed decisions.”
The consultation will be open for ten weeks, closing on January 13.
With unemployment threatening to reach record levels as the public sector shrinks, it is essential that consumers can purchase protection against accident sickness and unemployment when they commit to a mortgage or large loan. Mortgages must be made easier to obtain and mortgage protection products available to alleviate some of the risks involved in lending for both parties.
There are many established independent specialist companies out there who offer insurance at much cheaper rates than the loan or mortgage providers. Maybe one solution to this ongoing saga would be to outlaw totally the provision of cover for debt by the debt provider and its subsidiaries however they want to dress it up in fancy wordings.