Response to consultation on Professional Indemnity Insurance (PII) for mortgage credit intermediaries
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To have liability, we need
- a real injury caused by someone (materiality)
- a link between the injury and the action (or inaction) of a person (causality)
- an identified responsible person
An intermediary is between a client and a bank (or insurance company). He does not create anything. He does not decide anything. The more often he connects the customer with the bank and conducts pre-contractual tasks on behalf of the bank to facilitate its work.
He does not create, he proposes. What does he propose? Products that are legal. We can not propose illegal products.
What would then be the injury?
- the intermediary would not have well explained a credit contract to his customer
- the intermediary would not have well explained the customer that the credit rate was variable
- the intermediary did not disclose all the fees related to the credit operation.
Yet the credit contract is written and nowadays protection systems allow customers to have a reflection period for mortgage loan.
The customer can read and can understand.
Then we have to remind that if there is real estate sale and mortgage loan, a notary is compulsory to sign the different acts and the notary will have to get the customer in real time the key points of the mortgage loan conditions: rate, duration, fees, etc.
Let’s list the persons who interfere into such an operation :
A – the customer
B- the intermediary
C- the bank
D - the notary
And we can add the real estate agent!
Why intermediaries should bear the responsibility to compensate damage in this chain of professionals? And if an injury occurs how could he pass filters?
However, there may be real causes for which the intermediary would be responsible:
- The intermediary has not done its job of presentation and the loan was refused;
- The intermediary has not done its job and the customer has lost a chance to get a loan and thereby lost the chance to buy a property that suited him.
- The intermediary proposed to the customer a 4% loan rate when it could have proposed a 3% loan rate. Therefore the customer could have beneficiate of a lower loan rate (conflict of interest between the customer and the intermediary where the intermediary was more remunerated with the 4% loan rate)
There is a mistake of the intermediary. Yet texts do not consider theses possible lacks and do not give enough examples or cases where intermediaries would make a mistake. Parliament focuses on an inherent responsibility to the loan offer and the advice given by an intermediary. Inside loan contracts and advices the possibility that an injury occurs is almost inexistent. There are too many filters. The customer would then be a person who can not understand anything. An irresponsible. A juridical protected person?
The customer after receiving explanations, meeting contenders, receiving the loan offer, reading the loan offer, verifying that he or she can afford the loan, signing in front of a notary who has well made its job, would then be driven to mistake ? I doubt about it.
Warning: if the intermediary or the bank, or even the notary knowingly lied to the customer, or altered reality, its liability insurance will not work. A civil liability requires that the fault is common and unintentional.
Let’s get back to my 3 examples :
The intermediary has not done its job of presentation and the loan was refused;
- The intermediary has not done its job and the customer has lost a chance to get a loan and thereby lost the chance to buy a property that suited him.
- The intermediary proposed to the customer a 4% loan rate when it could have proposed a 3% loan rate. Therefore the customer could have beneficiate of a lower loan rate (conflict of interest between the customer and the intermediary where the intermediary was more remunerated with the 4% loan rate)
There is indeed loss of opportunity which causes an injury to the customer. The intermediary has not completed its professional obligations. The client met an incapacitated professional. These cases remain rare and isolated.
In the last example, if we look only at the credit rate, one might think that the agent has made a mistake. But one should look at the loan terms entirely.
- The bank that lends a 3% loan rate requires opening a bank account with them with much higher fees out of the loan offer (not included in the APR).
- The bank that lends a 3% loan rate accepts the renegotiation of its rate during the loan but with a € 500 fee when the bank that offers a 4% loan rate proposes the same renegotiation facility with only € 150 fee.
- The bank that lends to 4% offers customers the possibility to postpone for free for 12 months in case of financial difficulties; the one that lends a 3% does not offer this possibility.
- The request for a statement of the outstanding is charged € 80 by the bank that lends to 3%, while that on that lends to 4% does not charge anything.
To answer the question asked by the EBA, should there be a minimum amount of coverage?
All depends on the injury. If the parliament takes the intermediary as the responsible of all problems and damages that can occur in the mortgage loan process, then in that case the answer is NO. The amount of coverage should be high.
If the parliament decides an automatic liability of the intermediary, the answer is again NO. The amount of coverage has to be higher.
If the parliament accepts that the intermediary can defend itself and can prove that he has well done its professional obligations and that the injury caused to the customer is not of its mistake, then in that case, the answer is YES. The minimum coverage is sufficient.
By imposing a PII to credit intermediaries, a new obligation is imposed to them in order to be authorised to work.
This text will open a new market for insurance companies! The parliament will not give a maximum price for this insurance. I remember when I started to work as insurance intermediary, I did not have any customers yet. But I had to pay € 420 per trimester for my PII. I had to wait 2 years for this price to be covered by my insurance commissions. It avoids people to enter this profession.
The credit intermediary does not give the credit agreement. It is the intermediary between the bank and the customer. The risk of injury for the customer is much less important in the credit intermediation. As well as the credit intermediary can not accept and sign the mortgage loan contract at the customer’s place.
Does the MCD want to put an automatic, large or minimum liability on the credit intermediary?
In which case can the credit intermediary’s liability be engaged?
If we consider the credit intermediary has limited power in the mortgage loan process and that it is just a piece of the professional chain such as Bank, notary or real estate agent, then the possibility for the credit intermediary to make a mistake is reduced. In that case, a minimum coverage is sufficient.
If we consider that all damage arising from the loan contract is attributable to the intermediary automatically, so you have maximum coverage.
If the liability cases are reduced through the own professional capacity of the credit intermediary, then a lower level of guarantee can be decided.
In France, the customer must return the loan contract himself to the bank by postal mail. He can not bring it to the credit intermediary. So if the customer signs, without the presence of the intermediary, it remains free to engage knowingly.
In France, we had it a few years ago the Apolonia” scandal, the name of a residential complex for housing or rental investment in the south of France. This scandal consisted of "integrated" packaged for real estate acquisition with loan contract mechanism. The customer would meet a real estate agent who handled the sale of real estate, and find the home loan. Some bank managers, solicitors and estate agents were arrested.
What was the problem?
Some regional bank directors signed mortgage loan contracts at customers’ place in order that customers would not be able to read and see that the credit conditions were not favourable!
Here in that case there is no problem of civil liability. It is penal! The PII will not work.
Minimum coverage is not the solution. We need a maximum coverage at the lowest price."
In this case, I propose clearly explained thresholds such as:
- Coverage for business start-ups including only the minimum and adequate PII in relation to the number of case or the amount of commission earned per year.
- Coverage with thresholds based on the amount of commission earned in the year (turnover)
- Additional coverage for intermediaries cashing funds on behalf of insurance companies (financial guarantee)
- In option, a legal professional coverage
Thus, distinguishing these guarantees, it allows a better control of price without imposing disproportionate guarantees to the actual activity of the intermediary.
Do you agree that, of the four options presented, option 4 (i.e. setting the minimum amount at the average of the amounts used in Member States) is the option the EBA should pursue, resulting in a minimum amount of EUR 584 000 per claim, and EUR 886 000 per year?
The answer is not easy to give. If we consider the principles of the civil liability (PII), we should analyze the juridical mechanism :To have liability, we need
- a real injury caused by someone (materiality)
- a link between the injury and the action (or inaction) of a person (causality)
- an identified responsible person
An intermediary is between a client and a bank (or insurance company). He does not create anything. He does not decide anything. The more often he connects the customer with the bank and conducts pre-contractual tasks on behalf of the bank to facilitate its work.
He does not create, he proposes. What does he propose? Products that are legal. We can not propose illegal products.
What would then be the injury?
- the intermediary would not have well explained a credit contract to his customer
- the intermediary would not have well explained the customer that the credit rate was variable
- the intermediary did not disclose all the fees related to the credit operation.
Yet the credit contract is written and nowadays protection systems allow customers to have a reflection period for mortgage loan.
The customer can read and can understand.
Then we have to remind that if there is real estate sale and mortgage loan, a notary is compulsory to sign the different acts and the notary will have to get the customer in real time the key points of the mortgage loan conditions: rate, duration, fees, etc.
Let’s list the persons who interfere into such an operation :
A – the customer
B- the intermediary
C- the bank
D - the notary
And we can add the real estate agent!
Why intermediaries should bear the responsibility to compensate damage in this chain of professionals? And if an injury occurs how could he pass filters?
However, there may be real causes for which the intermediary would be responsible:
- The intermediary has not done its job of presentation and the loan was refused;
- The intermediary has not done its job and the customer has lost a chance to get a loan and thereby lost the chance to buy a property that suited him.
- The intermediary proposed to the customer a 4% loan rate when it could have proposed a 3% loan rate. Therefore the customer could have beneficiate of a lower loan rate (conflict of interest between the customer and the intermediary where the intermediary was more remunerated with the 4% loan rate)
There is a mistake of the intermediary. Yet texts do not consider theses possible lacks and do not give enough examples or cases where intermediaries would make a mistake. Parliament focuses on an inherent responsibility to the loan offer and the advice given by an intermediary. Inside loan contracts and advices the possibility that an injury occurs is almost inexistent. There are too many filters. The customer would then be a person who can not understand anything. An irresponsible. A juridical protected person?
The customer after receiving explanations, meeting contenders, receiving the loan offer, reading the loan offer, verifying that he or she can afford the loan, signing in front of a notary who has well made its job, would then be driven to mistake ? I doubt about it.
Warning: if the intermediary or the bank, or even the notary knowingly lied to the customer, or altered reality, its liability insurance will not work. A civil liability requires that the fault is common and unintentional.
Let’s get back to my 3 examples :
The intermediary has not done its job of presentation and the loan was refused;
- The intermediary has not done its job and the customer has lost a chance to get a loan and thereby lost the chance to buy a property that suited him.
- The intermediary proposed to the customer a 4% loan rate when it could have proposed a 3% loan rate. Therefore the customer could have beneficiate of a lower loan rate (conflict of interest between the customer and the intermediary where the intermediary was more remunerated with the 4% loan rate)
There is indeed loss of opportunity which causes an injury to the customer. The intermediary has not completed its professional obligations. The client met an incapacitated professional. These cases remain rare and isolated.
In the last example, if we look only at the credit rate, one might think that the agent has made a mistake. But one should look at the loan terms entirely.
- The bank that lends a 3% loan rate requires opening a bank account with them with much higher fees out of the loan offer (not included in the APR).
- The bank that lends a 3% loan rate accepts the renegotiation of its rate during the loan but with a € 500 fee when the bank that offers a 4% loan rate proposes the same renegotiation facility with only € 150 fee.
- The bank that lends to 4% offers customers the possibility to postpone for free for 12 months in case of financial difficulties; the one that lends a 3% does not offer this possibility.
- The request for a statement of the outstanding is charged € 80 by the bank that lends to 3%, while that on that lends to 4% does not charge anything.
To answer the question asked by the EBA, should there be a minimum amount of coverage?
All depends on the injury. If the parliament takes the intermediary as the responsible of all problems and damages that can occur in the mortgage loan process, then in that case the answer is NO. The amount of coverage should be high.
If the parliament decides an automatic liability of the intermediary, the answer is again NO. The amount of coverage has to be higher.
If the parliament accepts that the intermediary can defend itself and can prove that he has well done its professional obligations and that the injury caused to the customer is not of its mistake, then in that case, the answer is YES. The minimum coverage is sufficient.
By imposing a PII to credit intermediaries, a new obligation is imposed to them in order to be authorised to work.
This text will open a new market for insurance companies! The parliament will not give a maximum price for this insurance. I remember when I started to work as insurance intermediary, I did not have any customers yet. But I had to pay € 420 per trimester for my PII. I had to wait 2 years for this price to be covered by my insurance commissions. It avoids people to enter this profession.
Do you consider the number and the compensatable loss of compensation claims arising from the activity of mortgage intermediation to be lower than, the same as, or higher than those arising from insurance intermediation? Please explain your reasoning.
Making a comparison between credit intermediaries and insurance intermediaries is a mistake. . The insurance intermediary has authority to bind the insurance company to a risk, or an investment. The risk of a conflict of interest is there. The customer is not protected to meet an intermediary who would prefer earning more commission proposing the customer an investment with high level of risk and without the customer to understand well this risk. In addition, an investment contract is signed with the intermediary. There are no other actors in the contracting process.The credit intermediary does not give the credit agreement. It is the intermediary between the bank and the customer. The risk of injury for the customer is much less important in the credit intermediation. As well as the credit intermediary can not accept and sign the mortgage loan contract at the customer’s place.
Do you know of options other than those listed in this consultation paper that the EBA should consider when deciding on the minimum amount of coverage?
I get back to my thoughts in the answer to question 1. One has to verify precise cases in which the credit intermediary makes a mistake causing a real and certain damage to the customer.Does the MCD want to put an automatic, large or minimum liability on the credit intermediary?
In which case can the credit intermediary’s liability be engaged?
If we consider the credit intermediary has limited power in the mortgage loan process and that it is just a piece of the professional chain such as Bank, notary or real estate agent, then the possibility for the credit intermediary to make a mistake is reduced. In that case, a minimum coverage is sufficient.
If we consider that all damage arising from the loan contract is attributable to the intermediary automatically, so you have maximum coverage.
If the liability cases are reduced through the own professional capacity of the credit intermediary, then a lower level of guarantee can be decided.
In France, the customer must return the loan contract himself to the bank by postal mail. He can not bring it to the credit intermediary. So if the customer signs, without the presence of the intermediary, it remains free to engage knowingly.
In France, we had it a few years ago the Apolonia” scandal, the name of a residential complex for housing or rental investment in the south of France. This scandal consisted of "integrated" packaged for real estate acquisition with loan contract mechanism. The customer would meet a real estate agent who handled the sale of real estate, and find the home loan. Some bank managers, solicitors and estate agents were arrested.
What was the problem?
Some regional bank directors signed mortgage loan contracts at customers’ place in order that customers would not be able to read and see that the credit conditions were not favourable!
Here in that case there is no problem of civil liability. It is penal! The PII will not work.
Minimum coverage is not the solution. We need a maximum coverage at the lowest price."
Do you consider threshold(s) that distinguish between more than one minimum amount of PII coverage to be a desirable feature? If so, please explain how such a threshold should be devised.
Imposing new financial obligations on insurance intermediaries could lead to limit access of new candidates into the profession.In this case, I propose clearly explained thresholds such as:
- Coverage for business start-ups including only the minimum and adequate PII in relation to the number of case or the amount of commission earned per year.
- Coverage with thresholds based on the amount of commission earned in the year (turnover)
- Additional coverage for intermediaries cashing funds on behalf of insurance companies (financial guarantee)
- In option, a legal professional coverage
Thus, distinguishing these guarantees, it allows a better control of price without imposing disproportionate guarantees to the actual activity of the intermediary.