Payment Protection Insurance - Controversy

Controversy

In all types of insurance some claims are accepted and some are rejected. However, in the case of PPI, the number of rejected claims is high compared to other types of insurance. A primary reason for this is that, as with many forms of general insurance, the insurance is not underwritten at the sales stage; it is sometimes taken out by customers without careful consideration as to whether it is right for their circumstances, and without careful attention to the policy eligibility conditions. Individuals who seek out and purchase a policy without advice have little recourse if and when a policy does not benefit them. However, most PPI policies are not sought out by consumers. In some cases, consumers claim to be unaware that they even have the insurance.

As PPI is designed to cover repayments on loans and credit cards, most loan 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 increase of 7 million policies a year being purchased thereafter. Surveys show that 40% of policyholders claim to be unaware that they had a policy.

"PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade." with this mis-selling being carried out by not only the banks or providers, but also by third party brokers. One major High Street bank sold almost £400m of PPI with their financial products, making a gross profit margin of 80%. The sale of such policies was typically encouraged by large commissions, as the insurance would commonly make the bank/provider more money than the interest on the original loan, such that many mainstream personal loan providers made little or no profit on the loans themselves; all or almost all profit was derived from PPI commission and profit share. Certain companies developed sales scripts which guided salespeople to say only that the loan was “protected” without mentioning the nature or cost of the insurance. When challenged by the customer, they sometimes incorrectly stated that this insurance improved the borrower's chances of getting the loan or that it was mandatory. A consumer in financial difficulty is unlikely to further 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. Alliance and Leicester were fined £7m for their part in the mis-selling controversy, several others including Capital One, HFC and Egg were fined up to £1.1m. Claims against mis-sold PPI have been slowly increasing, and may approach the levels seen during the 2006-07 period, when thousands of bank customers made claims relating to allegedly unfair bank charges. In their 2009/2010 annual report, the Financial Ombudsman Service 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.

Slightly before that, on 6 April 2011, the Competition Commission released their investigation order 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.