Free periods may break TCF rules

Free periods 'may break TCF rules'

7 February, 2007

CETA believes ‘free’ periods offered to consumers taking out mortgage or household insurance can offer poor value for money over the on risk period of the policy and also has the effect of undermining the client’s desire to buy suitable protection.

David Quick, managing director of CETA, believes the FSA may be prompted to act due to the high incidence of cancellation following the free period which suggests unsuitable policies are being sold in the first instance.

“The clear implication is that people are being signed up solely because the first three or six months are free. The cancellation levels would be far lower if the true value of the policy and its benefits was explained correctly and clients were convinced at the outset of the merits of buying the insurance.

He said it is inevitable that the ‘free’ deals are likely to come under the scrutiny of the FSA under its Treating Customers Fairly initiative with any broker selling a policy which pays commission during the free period likely to face an investigation of their sales processes.

The issue of ‘free’ periods arose after a MPPI policy sold through one of the largest providers to brokers – which includes a six-month free period – came in for criticism because its charges were 24 per cent higher each month than a similar policy where premiums are paid from the outset.

Quick added: “The simple fact is that these so-called ‘free’ periods are not free – the cost is merely deferred and they quickly become very expensive. The payments in the months following the free offer period are far higher than is available by shopping around for the same level of cover.

“This has a knock on effect on compliance. Can a broker claim to be treating customers fairly by only offering the three or six-month free policy without clearly explaining the long-term cost may be higher and giving an option to buy a better value best-quote policy that will be far cheaper overall?”

He predicts free period policies will disappear over the coming months as the FSA takes steps to ensure the TCF rules are being followed: “In the meantime brokers will have to be very careful about how free period products are sold if they are not to open themselves up to mis-selling complaints.”