In January the Financial Services Authority (FSA) and Office of Fair Trading (OFT) published joint guidance on payment protection products, with the aim of preventing the payment protection insurance (PPI) mis-selling scandal recurring in a new generation of products.
In recent years firms have stopped selling PPI – which was widely mis-sold – and begun to offer other forms of protection, such as STIP and debt waivers linked to credit agreements or mortgages. The FSA has said that while these products may offer benefits to customers, there is a risk they could pose dangers similar to PPI.
Here, we highlight some key points from the guidance, and analyse what they mean for the future direction of STIP:
* The product must be aligned with the needs of a clearly identified target market.
Q. What does this mean for STIP?
A. “The difficulty for STIP is that consumers need to be very clear about what they are buying. To ensure that STIP is an ethical product insurers must: ensure that the product is properly underwritten and pays all legitimate claims promptly; that the product is not lapsed and re-sold at the behest of the distributor when existing cover is still valid; that customers are aware they are buying a product with a limited benefit paying term and that there are products that will pay to retirement age.” – Peter Le Beau, Income Protection Task Force
* Firms who target or sell to consumers with savings will face a higher challenge to demonstrate that such a target market or sale is fair.
Q. Should STIP not be sold to people who have savings they could rely on in the event of being out of work?
A. “Just because an individual has savings, it does not mean they should self-insure. They must be made aware of the insurance options available and decide whether they wish to risk losing their savings in the event of incapacity.” – David Macgregor, Wiltshire Friendly
* Firms should be able to demonstrate that a product’s deferred payment period is as short is as reasonably required to manage the anti-selection risk in its target market.
Q. Should STIP products have deferred periods of a few weeks only?
A. “This is where a good financial adviser is essential to the sales process. They will speak with the customer to ascertain their attitude to risk, if they have any ongoing income in the event of incapacity and if they have savings that they would be prepared to use to help see them through a period without income. Once this has been established, then they will recommend a deferred period to match the need.” – David Macgregor, Wiltshire Friendly