Payment Protection Insurance (PPI) is one of the most controversial ‘optional’ extras for credit agreements, in particular for loans, credit cards and second mortgages – and one that has been widely mis-sold and is now subject to billions of pounds worth of compensation claims. Payment Protection Insurance is also known by many other names including Accident Sickness and Unemployment insurance, credit insurance, credit protection insurance, and loan repayment insurance. It is an ‘import’ from the US, where PPI was widely sold by companies such as Security Pacific for many years prior to its introduction into the UK.
Adding Payment Protection Insurance to a credit facility typically adds 20-25% to the monthly cost of credit, and typically over 50% of the premiums are returned to the lender as insurance commission.
This means that although the major banks and credit providers are facing massive claims for mis-sold Payment Protection Insurance, it’s likely that a good proportion of this has already been banked as profit, so the actual loss to the credit grantors is not as bad as it seems. It also means that for many banks and other lenders, PPI provided a significant, and sometimes the majority of the profit stream from lending money.
An insurance product, PPI provides payments - after a ‘wait period’ typically of three months. – if a the borrower suffers an accident that prevents them from working, becomes ill or disabled, or is made redundant.
The insurance was mis-sold on several counts. Firstly, it does not cover claims by the self-employed, and despite many borrowers stating clearly on application forms that they are self-employed, lenders still offered and sold the insurance to them.
Some borrowers were advised (incorrectly) that the decision on a credit application would be subject to, or enhanced by, the taking up of Payment Protection Insurance at the point of application. This is in fact unlawful.
Borrowers were also not advised about the wait period. As the insurance did not kick in until three months had passed, this often meant that a loan or credit card would be three months in arrears before any relief came. Most lenders take recovery action well before this, so the concept of providing peace of mind for unforeseen life events is fatally flawed.
In other cases, consumers claim to be unaware that they contracted to purchase Payment Protection Insurance. Often the option was a simple tick box, in a sea of terms and conditions and other tick boxes, or in the worst cases, a box had to be unticked to opt out from adding PPI ‘protection’ to a credit facility.
Approximately 30m PPI policies have been sold, and the now defunct Financial Services Authority has been widely criticised for its failure to act more quickly than it did in protecting consumers. Nevertheless, the FSA imposed fines in its regulatory capacity on many lenders including Egg, Alliance and Leicester (now Santander), Capital One and HFC, and advised at one stage that mis-sold PPI was the largest complaint received by the Financial Ombudsman.
PPI is still sold today, but is now subject to safeguarding procedures introduced in late 2011, which basically revolve around better information being provided to the borrower, an annual review, and most importantly, lenders were no longer able to sell the insurance at the point of sale -i.e. at the application form stage.
The mis-selling of PPI was widely known about well before the scandal broke and compensation claims started flooding in. In this very jargon buster, we were quite blunt and critical about it, but surprisingly the OFT asked us to remove the content. The Citizens Advice Bureau mounted a ‘Super Complaint’ in a document called ‘Protection Racket’ which just about sums it all up.
Judge for yourself if you really want to add 20-25% to your repayments for a policy that rarely pays out as you might hope it will, and which will return up to half of the premiums you pay for Payment Protection Insurance back to the lender as commission.
If you think you have been mis-sold PPI already, you can use a claims management company, but it’s just as easy to do it yourself – there are several references to help you to do this.