Since 1995, the Government has expected new mortgagors to take out Mortgage Payment Protection Insurance (MPPI) to cover mortgage payments during short-term unemployment, accident or sickness; yet take-up of MPPI remains low. Whilst approaching half of mortgage business, and potentially MPPI business, is introduced by financial intermediaries, very little is known about the views of intermediaries on MPPI or the way they sell MPPI. Research by Janet Ford and Deborah Quilgars examined intermediaries' perspectives and experiences of the MPPI market and the role they play in encouraging take-up. The study found:
- Intermediaries offered customers little or no choice of MPPI products. Further, most intermediaries, particularly smaller ones, selected MPPI policies on the basis of very limited information of the MPPI market. The larger companies had negotiated specially branded, 'block' policies; here, individual advisors were not aware of the selection criteria and were often selling the policy blind.
- Intermediaries placed very differing levels of emphasis on MPPI in the sales process. Some recommended MPPI in all cases, and early in the process, whilst others briefly mentioned the product. A number of intermediaries used a waiver form/disclaimer clause as a sales tool; a few packaged MPPI along with other products to increase sales.
- Attitudes to MPPI per se and in relation to other safety-net insurance products heavily influenced the sales process. The minority who believed strongly in the product sold more policies than those with reservations about MPPI. Some intermediaries, particularly independent financial advisors (IFAs), felt that products such as permanent health insurance often represented better value, and more comprehensive protection, than MPPI.
- Intermediaries' assessment of the MPPI market revealed: a relatively critical attitude to the product; an awareness that the market was structured to the benefit of the larger players, particularly lenders; general support for some form of statutory regulation, in particular an integrated and consistent system across financial products; and mixed reactions to present training opportunities.
- The study suggests that take-up of MPPI is unlikely to increase substantially whilst consumers are receiving very varying advice from financial intermediaries and intermediaries continue to question the structure of the MPPI market.
The recent Housing Green Paper has reiterated the importance of sustainable owner-occupation. Home-buyers face a range of risks which may reduce their ability to meet their mortgage payments, including unemployment, illness and relationship breakdown. In 1999, 30,000 households lost their property as a result of mortgage possession, with 300,000 experiencing mortgage arrears of at least two months. Effective safety-net provision is crucial if sustainable home-ownership is to be achieved.
Since 1995, the government has supported a public/private partnership approach to safety-net provision for home-buyers. Since October 1995, new mortgagors on Income Support or Jobseeker's Allowance have to wait nine months before they receive state assistance with their mortgage interest payments (ISMI). Instead, home-buyers are expected to take out private insurance to cover their mortgage payments (MPPI) during this period. However, take-up of MPPI remains low at 19 per cent of all mortgagors (1999), and 25 per cent of new borrowers. It is estimated that the necessary level of take-up to sustain home-ownership is 50-55 per cent of all mortgagors.
Home-buyers may purchase MPPI in two main ways: from their lender, or through a financial intermediary such as an estate agent or mortgage broker. Approaching half of all mortgage business is introduced through intermediaries (and so, potentially, half of all MPPI business), and evidence suggests that this proportion is growing, yet to date little research has focused on the intermediary market.
Several factors have contributed to the growth in intermediary activity in this area, but one key influence is the way in which increasing intermediary activity is the basis on which lending organisations can expand and increase the number of borrowers without having to invest in additional infrastructure and branch networks. Further, reliance on financial advisors is one likely response of households to the additional responsibilities for financial planning that have been transferred to them through the restructuring of welfare, in a context where there is no significant tradition of financial planning and poor financial literacy.
The intermediary market
Financial intermediaries essentially 'stand between' a potential customer and one or more products or services. They are key 'gate-keepers' in relation to providing information on, and negotiating access to, a range of financial products, including pensions, life insurance, mortgages and MPPI. Financial intermediaries may be 'independent', that is able to advise on all products, or 'tied', where they are employed by or represent one company only in the sale of some or all products.
The main type of intermediary likely to be selling MPPI are those who also sell mortgages. In 1999, there were 14,000 companies registered with the Mortgage Code Compliance Board (MCCB), the main voluntary regulator of the industry, representing 43,500 individual mortgage advisors. There are six main types of mortgage intermediary:
- Specialist mortgage brokers: whose primary activity is selling mortgages and related products;
- Insurance brokers: who will generally offer insurance in the area of personal protection;
- Independent financial advisors (IFAs): who offer advice on the full spectrum of financial products;
- Estate agents: who employ advisors to assist potential buyers with arranging the mortgage and related products;
- Solicitors and accountants: a small proportion of whom may arrange mortgages;
- Lenders: whilst direct providers of mortgages, lenders act as intermediaries for the sale of MPPI.
Regulating the market
The present regulatory framework for the sale of MPPI is characterised by the promotion of voluntary standards, including:
- The Mortgage Code, effective for lenders since 1997 and intermediaries since 1998, and monitored by the MCCB, sets down guidelines for mortgage lending practice, and states that insurance services including MPPI should be discussed with home-buyers;
- The Association of British Insurers has a Code of Practice for Sales of General Insurance which includes a Statement of Practice for MPPI;
- In 1998, a MPPI benchmark product was adopted by the industry to ensure a minimum level of MPPI cover;
- In 1999, a voluntary Certificate in Mortgage Advice and Practice (CeMAP), was introduced, although presently no formal qualifications are required to sell mortgages or MPPI.
Following considerable debate about the extent of consumer detriment in mortgage and MPPI selling, further changes to regulation are imminent. This will include the statutory regulation of mortgage information (although mortgage advice has been excluded as has the 'direct' regulation of intermediaries), and the establishment of a new self-regulatory insurance body, the General Insurance Standards Council.
The process of selling MPPI
The study found that intermediaries' approach to selling MPPI restricted customer choice, and influenced the likelihood of people purchasing MPPI.
Customer choice? Intermediaries selecting MPPI
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 different options. All products met or exceeded the baseline criteria for MPPI but both level of cover and price varied substantially across the sample.
The lack of choice to consumers was particularly worrying given that most of the intermediaries had selected, or were offering, MPPI products on the basis of very limited knowledge of the MPPI market. The smaller intermediaries had not undertaken any specific research into the market. The selection process was heavily influenced by the marketing strategies of particular companies (e.g. mailshots from providers to intermediaries; a provider presence on a mortgage computer database etc.), and to a lesser extent, by the trade press and affiliation to mortgage clubs.
"The simple fact of the matter is that we are not a general insurance broker ... and we haven't got the time to research the market."
The smaller intermediaries tended to select the MPPI that appeared to represent the best value for money for the customer, on available information. Commission did not tend to influence selection as most providers offered similar rates of remuneration (20-25 per cent of cost of policy).
The larger companies, in contrast, had resources available to them to select a product, and also the leverage which made it possible to negotiate a specially branded, and often a cheaper (to the intermediary), 'block', MPPI policy. Here, profit margin was an important factor in deciding which MPPI policy to select. For instance, one estate agency had negotiated a net rate of £2.50 per £100 of cover, and was selling the policies at £4.99 per £100. In larger companies, the MPPI policy was selected at the organisation's headquarters: this meant that mortgage advisors had no involvement in the process, and were often selling the product with no comparison with the rest of the market.
In the study, the costs to consumers of MPPI recommended by an intermediary could be as high as £6.75 against the current industry average of £5.54 per £100 insured; in contrast, the lowest cost was £1.50 per £100 insured. For a repayment mortgage of £400 monthly, the addition could therefore range from £6 to £27.
Factors influencing sales of MPPI
Estimates of customer take-up of MPPI varied enormously across intermediary organisations considered, from 5 per cent to 90 per cent. In general, the level of take-up appeared to be highest for lenders and estate agents, and the lowest for independent financial advisors. Three main factors appeared to influence the sale of MPPI significantly.
1. The approach to selling MPPI
All intermediaries reported that MPPI was brought to the customer's attention; many identified this as a requirement of the Mortgage Code. However, beyond this, intermediaries placed very differing levels of emphasis on MPPI in the sales process:
- Some intermediaries appeared to recommend 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; others did not mention it to the third interview; one company never mentioned it, relying solely on written material;
- A number of advisors used a waiver form or disclaimer clause for the customer to sign if they decided not to take out a policy. This was seen as a sales tool as well as protection for the intermediary;
- A couple of larger intermediaries had 'packaged' and/or 'presented' MPPI along with other products in order to try and sell a fully protected mortgage, and maximise sales.
2. Intermediaries' preference for alternative products
A number of intermediaries pointed out the potential alternatives to MPPI, in particular permanent health insurance (PHI). IFAs, in particular, felt this to be a better product offering long-term health insurance compared with the typical 12 months of MPPI cover. A few intermediaries argued for the use of unemployment cover and PHI together.
"A mortgage protection policy is going to cost them £30 a month, that £30 would buy an awful lot of permanent health insurance."
3. Overall attitude of advisors to MPPI
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.
"I give the client the option, you know, but as a financial advisor there are ways of doing things, aren't there? ... When it comes to [MPPI] I don't present it that strongly, because I know that if I was the client I would say no, because I think it is poor value for money."
Assessing the market
The interviews highlighted a number of issues about the present structure of the MPPI market:
The MPPI product
There were varying degrees of support for MPPI amongst intermediaries. Whilst 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.
Nature 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. The larger intermediaries also acknowledged the importance of block MPPI policies in generating volume business and therefore adding to profits (also sometimes receiving a profit-share from insurers). Smaller intermediaries perceived that the market was not very well developed.
Most intermediaries felt that regulation, of some nature, of the mortgage market was necessary and beneficial. The response of intermediaries to the Mortgage Code was either neutral or supportive. However, most intermediaries felt that the Code had not had a major impact on their operations: whilst some felt it had raised their awareness of MPPI, most did not feel it had substantially changed the mortgage selling process. It had, however, ensured that the documentation for sales they did make was in good order.
There was some support for the extension of statutory mortgage regulation, and for one integrated regulatory system across all financial products. Over half of intermediaries were not aware of the ABI Code of Practice, whilst statutory regulation via the Personal Investment Authority dominated the operation of IFAs.
Training and professionalism
Traditionally expectations of training and accreditation have been low amongst intermediaries. Intermediaries explained that access to formal training was not always easy, and in-house training tended to be ad hoc; mostly it involved companies coming in to describe their products, and thus training could be based on other companies' marketing. There were mixed reactions to the new Certificate in Mortgage Advice and Practice: some thought the standard was too low and part of it was considered irrelevant, although most were happy to undertake the training.
The research reinforces previous studies of MPPI which questioned the viability of providing social protection within a market framework where profitability is a key driver. As a result, the move towards intermediaries developing block contracts - or using a restricted panel of providers - reduced customer choice. The research also showed that intermediaries needed to be better informed about the products in order to aid choice and competition in the market.
In addition, the research raises the question of whether MPPI is in fact the most appropriate way to provide a safety-net, not least in relation to other available products. The failure to regulate mortgage advice, and only to regulate intermediaries indirectly, and the use of a distinct regulatory structure, separate from those used to regulate other financial products, were seen as disadvantageous to the market.
The research points to the potentially damaging impact of any further reduction in state provision via ISMI; at present consumers are likely to receive very varying advice from financial intermediaries and current take-up targets for MPPI are unlikely to be reached within the present market.
About the study
The study began with a policy review of the area, utilising material from a literature review of available policy and research documents, as well as from detailed interviews with eight policy-makers and policy advisors concerned with the development, and regulation of, financial services and MPPI. The main stage of the study involved in-depth interviews with 19 financial intermediaries across the range of intermediaries, including representatives of specialist mortgage brokers, estate agents, independent financial advisors, lenders and an insurance broker.