Protection racket
Speculation is growing that some major High Street banks could be fined £1 million or more each for mis-selling insurance sold with loans. Payment Protection Insurance (PPI) is supposed to insure the repayments on a loan if the borrower falls ill or finds themselves out of work. It sounds a good idea. But there are two charges laid against PPI. First, it often does not work. Second, even when it does it is far too expensive.
These charges are not just from consumer organisations campaigning on behalf of customers. They are made by the Financial Services Authority (FSA) which recently said that investigating PPI is one of its largest programmes. And by the Office of Fair Trading (OFT) which is shortly expected to refer the market for PPI to the Competition Commission.
In a report last October the OFT said that "many consumers were failed by PPI – insurance which gives them a poor deal and often less protection than they think." It estimated that the profits on PPI were excessive with barely a fifth of the money taken in premiums being paid out in claims. No wonder the market is worth £5.5 billion a year – of which the OFT says at least £1 billion is estimated to be excess profit.
The problem with PPI is that it usually provides very poor protection and may not even pay out at all. Far from repaying the debt, PPI sold with a credit card for example will usually just meet the minimum payments due each month for a year. At the end of that time the borrower will be in almost as much debt as at the start. PPI excludes people who lose their job for any reason except unexpected redundancy – and people over pension age are completely excluded from even those claims. Others find that their medical condition is excluded even if they do fall ill. The FSA found in 2005 that around half the firms it investigated failed to ensure that customers did not buy polices they could never claim on. It also found that the high levels of commission paid "could encourage mis-selling."
Earlier this month the FSA said that ‘around ten’ firms had been referred for enforcement action over the way they sold PPI. Three have already been fined, one censured, and two more ordered to take remedial action. That leaves a handful outstanding. Hence this week’s speculation that major names are in the frame for million pound plus fines.
Anyone borrowing money or taking out a credit card should normally say ‘no’ to the PPI they are offered. It can easily double the cost of a personal loan. If you really want this insurance, then go to an independent provider where it will be a lot cheaper – maybe a third of the cost. Ask questions about the exact circumstances in which you can claim and what payments you will get. Only then can you decide if the premiums are worth paying.
More information from the FSA
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