What the PPI crackdown means for brokers

Martin Sincup, protection product manager at LV=, explains how and when the Competition Commission ruling will affect brokers selling payment protection-style products.

The Competition Commission started investigating payment protection insurance (PPI) back in 2007 - something that had been on the cards for a while and was mainly driven by high levels of complaints from PPI policyholders.

The Commission found that the biggest issues were with the sale of accident, sickness and unemployment (ASU) style products, so as you would expect, the various types of PPI, MPPI and ASU were looked at.

However, the Competition Commission was also concerned that products that ‘smelled like' PPI should also be included.

This meant that the fairly-new-to-market short-term income protection products, which are similar to PPI but with benefit limits based on income rather than a loan, have also been covered by the new ruling. I'll call all of these products PPI for the purpose of this article.

Following its investigation, the Commission put together a series of remedies to clean up the market. After a lengthy challenge by Barclays, the new rules were finalised and issued to the market on 24 March this year, and the industry - providers, administrators and advisers - will all have to comply.

To be caught under the new rules, a product has to meet all of the following criteria: it must have a maximum time limit on the benefit period, be written for a term of less than five years, and allow for it to be terminated by the insurer.

It's important to note that, if a PPI product is bundled together with long-term protection products, it will still be caught by the new rules.

So what isn't covered under the rules? The short answer is everything else.

The sale of long-term income protection (PHI), critical illness or life cover will not be affected at all, or other general insurance products like buildings and contents cover.

The greatest impact on advisers will be the ‘point of sale prohibition', which applies from 6 April 2012.

The Commission wants PPI sales to be more obviously separate from a mortgage (or loan), and it wants the customer to be able to shop around, which means selling a PPI-style product at the same time as a mortgage is banned.

Therefore, if PPI should be recommended alongside a mortgage, a PPI quote can be given at any time, but cannot be sold until seven days after the date the lender formally makes the mortgage offer to your customer, or seven days after a customer is provided with the PPI quote - whichever one is the latter.

For example, let's say a mortgage review is carried out, a mortgage application processed and a PPI quote given to the customer at the same time.

Five days later the customer gets a formal mortgage offer. You would then have to wait a further seven days before you could sell them PPI, even though you gave them the quote at the mortgage review.

The exception to the rule is if the customer initiates the sale of the PPI. This is only acceptable if they phone or write online to request PPI.

If this happens, PPI can be sold sooner and the seven day rule is reduced to 24 hours from when the customer got in touch.

However, advisers are not allowed in any way to encourage or suggest that the customer does this. It has to be spontaneous and the Commission is clear this will be looked at very closely.

If PPI is sold ‘stand-alone' (not connected to a mortgage sale), the seven day rule also does not apply here. But, to be considered stand-alone, it has to be at least a month since the customer has had a formal mortgage offer.