Payment protection insurance or PPI mis-selling
Payment protection insurance
Payment protection insurance, (also known as PPI, credit protection insurance, loan repayment insurance) is an insurance product designed to cover a debt that is currently outstanding. In contrast income payment protection is not specific to a debt but covers any income. This debt is typically in the form of a loan or an overdraft, and is most widely sold by banks and other credit providers as an add-on to the loan or overdraft product. It typically covers the borrower against an accident, sickness, unemployment or death, circumstances that may prevent them from earning a salary/wage by which they can service the debt.
PPI usually covers minimum loan (or overdraft) payments for a set period (typically 12 months). After this point the borrower must find other means to repay the debt, though the period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt. PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. Careful assessment of what would happen if a person became unemployed is necessary.
So payment protection insurance might look like a good idea, but it is technical, and does not suit everyone.
Problems have occurred because those selling payment protection insurance sold it to all customers taking out a loan, and that sale was not always appropriate.
Payment protection insurance – so what went wrong?
As with types of insurance some claims are accepted and some are not, but in the case of PPI the number of rejected claims is high compared with other types of insurance. One major reason is that the insurance is arranged at the sales stage and is taken out by customers without careful assessment as to what it is right for that customer and without careful attention to the policy conditions. The sale of the insurance policy was the main aim, producing high income for the seller, supported by sales targets and incentives to sales staff.
Payment protection insurance is designed to cover repayments on loans and credit cards, most loans and credit card companies sell the product at the same time as they sell the credit product. By May 2008 20 million PPI policies existed in the UK with a further 7 million policies the following year. This would mean that at least 72% of the UK’s adult population had a PPI policy. Surveys show that 40% of policyholders were totally unaware that they had the policy. According to the Financial Services Authority 95% of all claims were upheld by the Financial Ombudsman Service (FOS), which means that 95% of PPI policies sold by banks and lenders in the UK were mis-sold. That is an astonishing level of mis-selling and it has been calculated that almost 70% of the adult UK population has been mis-sold a PPI policy.
PPI has been widely mis-sold, with mis-selling by banks and loan providers but also by third party brokers. One major high street bank sold almost £400m of PPI with their financial products making an astonishing 80% profit. The sale of such policies was typically encouraged by large commissions, and the insurance often made more for the bank or provider. Often the policy premium was paid in one go, so it increased the loan and the interest. Very little profit is made on a small loan, so all or almost all profit came from PPI commission and profit shares. Certain companies developed sales scripts which guided salespeople to say the loan was “protected” without mentioning the insurance or its cost. When challenged by the customer, they sometimes incorrectly stated that this insurance improves the borrower’s chances of getting the loan or that it had to be taken out. A consumer in financial difficulty was unlikely to question the policy and risk the loan being refused.
Several high-profile companies have now been fined by the Financial Services Authority for the widespread mis-selling of Payment Protection Insurance. Claims against mis-sold PPI have been slowly increasing and may approach the levels seen during 2006-07 period, when thousands of bank customers were making claims regarding unfair bank charges. In their 2009/2010 annual report, the FOS stated that 30% of new cases referred to payment protection insurance. A customer who purchases a PPI policy may initiate a claim for mis-sold PPI by complaining to the bank, lender or broker who sold the policy
The banks tried to fight the updated rules of the Financial Services Authority (FSA) and the Financial Ombudsman Service (FOS). In April 2011 the High Court heard a judicial review brought principally by the British Bankers’ Association (BBA). The bankers lost.
In April 2011 the Competition Commission released its report designed to prevent mis selling in the future. Key rules in the order, designed to enable the customer to shop around and make an informed decision, include: provision of adequate information when selling payment protection and providing a personal quote; obligation to provide an annual review; prohibition of selling payment protection at the same time the credit agreement is entered into. Most rules came into force in October 2011 with some following in April 2012.
There are 101 outfits advertising to help you recover compensation for mis-selling. Think hard before you sign up they will want a fee for their help. You can deal with this yourself by going direct to your lender or the broker who sold you the policy. If you do not get a positive response you can complain to the Financial Ombudsman Service.
Are you entitled to compensation?
There is a very useful article on from the Financial Ombudsman Service you can read which explains if you are entitled to compensation, and how to go about getting it.
A useful place to start is to check the details of the policy itself. Then ask yourself these questions:
- Did you know you were buying insurance?
- Were you told (falsely) you must buy the insurance?
- Did it provide you with cover? (Self-employed people, for example, are not covered by PPI)
- Did you even need it?
If you think you have grounds for complaint, write to the outfit which sold the policy and make your complaint. If they are not reasonably quick then move onto the Financial Ombudsman Service. Be warned there must be an enormous backlog by now.
The BBC recently reported an FSA estimate that someone who had been mis-sold a single-premium policy, where all the cost was paid upfront, might be repaid an average of £1,800. Someone who had bought a policy requiring regular premiums might receive on average £900.
With thanks to Wikipedia whose contributors set out the story very well.