As a child in the early Seventies, I eagerly looked forward to watching the latest episode of the hugely popular TV show
The Six Million Dollar Man. Thirty years later, I find myself studying something far less entertaining and wholesome: the Six Billion Pound Banking Scam caused by widespread mis-selling of payment protection insurance!
What is payment protection insurance (PPI)?Payment protection insurance is optional cover which is sold to customers when they apply for credit and store cards, car loans and hire-purchase agreements, personal loans, mortgages and secured loans, etc. In theory, if you fall ill, have an accident or lose your job, your PPI policy meets your monthly debt repayments until you get back to work.
Most PPI policies will only pay up to twelve monthly benefits in a row for a single claim, and policies covering cards and loans also include life insurance to repay your debt if you die. Hence, PPI for cards and loans is often referred to as life, accident, sickness and unemployment insurance (LASU cover); with mortgages, it’s known as ASU cover.
British Insurance offer the best value mortgage PPI aroundBefore becoming a financial writer in 2002, I worked in the payment protection insurance industry for more than a decade. As one of the UK’s leading authorities on PPI (and its greatest critic!), I will reveal how PPI providers have scandalously mistreated their policyholders and created what may well be today’s biggest financial scandal.
PPI is one big "protection racket"!When customers apply for credit, they are offered PPI as an add-on - and lots of them buy it! I estimate that half of all personal loans and around a quarter of credit cards and mortgages are ’protected’ by PPI. Furthermore, with 6 to 7 million new PPI policies being sold each year, there’s plenty of money to be made from selling this cover. Overall, I estimate that there may be as many as 28 million PPI policies in existence, which is almost one for each of the UK’s 29 million workers.
What’s more, thanks to huge increases in personal debt levels, the income from sales of PPI has tripled in just eight years, rising from an estimated £2 billion in 1998 to a record £6 billion this year. Thus, PPI is now the UK’s third-largest general insurance product, behind motor and household insurance. However, while motor and household insurers charge fairly competitive premium rates and commissions, PPI providers do no such thing: they charge as much as they possible can for these policies!
Never buy PPI ’bundled’ with another financial productSo, what’s wrong with payment protection insurance? I think that a better question would be: what’s right with it? Indeed, there are five major problems with PPI, as follows:
1) Thanks to huge commissions, PPI is massively overpricedAlthough PPI appears to offer valuable protection against unexpected hazards, this peace of mind comes at far too high a price!
Of the £6 billion of premiums collected during 2006, only around £1 billion will be returned to claimants as payouts. The remaining £5 billion will be pocketed in the form of hefty commissions to lenders (which account for roughly two-thirds of PPI premiums) plus the additional profits which are shared by lenders and insurers. Thanks to these excessive profits, British borrowers pay six times as much as they need to for PPI, making it incredibly poor value for money!
Greedy for the easy profits to be made from selling PPI, many lenders charge sky-high premiums for this protection. In some cases, PPI bought from a high-street bank can be three, five, even ten times as expensive as a Best Buy policy!
Cut out big commissions on loan cover... go independent2) Lenders rule the roost, preventing fair competitionAs more than nine-tenths (90%) of all PPI policies are bought at point of sale, banks, building societies and other lenders have this market completely sewn up. They keep a tight grip on their captive audience of borrowers to whom PPI can be sold, creating an environment ripe for anti-competitive behaviour and sharp practices.
In fact, lenders control the design, pricing and distribution of PPI policies and, with exclusive access to borrowers, they have complete control of this market. Therefore, in what amounts to a ’closed shop’, lenders don’t have to worry about price competition and can charge as much as they can for PPI. Thus, PPI has grown to become the most overpriced (and profitable) financial product currently available in the UK.
The problems with PPI are deep-rooted: lenders of all sizes and types make a killing from selling PPI, with the biggest lenders being the worst offenders. Hence, it’s no wonder that both the Financial Services Authority (FSA) and the Office of Fair Trading are investigating the PPI market!
British Insurance offer the best value mortgage PPI around3) Lenders push PPI using dodgy sales techniquesUntil January 2005, when the FSA took over the regulation of general insurance, widespread mis-selling of PPI was the norm. Even under the watchful eye of the FSA, the dodgy selling techniques and tricks of the PPI trade continue.
For example, almost all quotes for personal loans automatically include PPI in the price - a technique known as ’assumptive selling’. Also, salespeople use what’s known as ’conditional selling’, in which they hint that borrowers won’t get credit unless they also buy PPI alongside it. Moreover, thanks to a lack of information about PPI in marketing literature, documentation and on websites, it’s almost impossible for buyers of PPI to fully understand what they are buying - and whether it is suitable for them.
Another problem is that adding PPI to the cost of a personal loan doesn’t affect the annual percentage rate (APR). In other words, the interest rate quoted for a personal loan doesn’t increase when PPI is added on. If PPI did affect APRs, the effective APR would double, revealing all too clearly how expensive this protection really is!
Never buy PPI ’bundled’ with another financial product4) Policies are badly designed and difficult to claim againstThanks to a lack of policy and industry standards, PPI policies are complex and confusing. Thanks to vague policy wordings, even I sometimes struggle to understand what’s actually on offer! Tucked away in the small print, you’ll find lots of get-out clauses, exclusions and other nasties, with wide variations in exclusions, how and when benefits are paid out, and heaps of jargon!
The OFT’s ongoing investigation into PPI revealed that there are around 450,000 claims a year, which means that only about one in sixty policies (1.6%) receives a claim each year. One reason for this is that PPI is sold ’off the shelf’ in a ’one size fits all’ approach, so it is frequently mis-sold to borrowers who cannot possibly make a successful claim. Sadly, policyholders who try to cancel their single-premium loan PPI find that it is difficult to cancel and, even if they are successful, they will not receive a pro rata refund.
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