Is this the end for single premium PPI?
The financial watchdog is urging banks to stop selling single premium payment protection insurance (PPI) alongside personal loans as part of its plans to beef up the regulation of this controversial protection product.
Single premium PPI – where the insurance premium is wrapped up into the loan amount, thus attracting interest – has been dogged with controversy not least because banks and other lenders stand accused of using aggressive sales technique to push it onto borrowers.
Back in 2007, the Financial Services Authority (FSA) carried out an investigation into the way banks and other firms sell PPI to customers, which found the sector was riddled with mis-selling problems.
Another investigation by the Competition Commission found banks are overcharging consumers for PPI by £1.4 billion, with millions of people taking up the insurance despite not being eligible to claim.
The FSA now says it will clamp down on firms whose sales practices break its rules, by levying large fines or taking action against individuals. It is also calling on banks and other lenders to stop selling single premium PPI alongside personal loans.
Of course, this ‘plea’ to banks has no legal effect and firms can continue to sell single premium PPI with personal loans for the time being. A spokesman for the FSA told Moneywise, however, that it may clamp down further down the line.
Jon Pain, managing director of the FSA's retail markets division, says: "Tackling poor PPI sales practices remains a high priority for the FSA. We will intervene to ensure consumers are protected and are considering what regulatory powers are the most appropriate to deliver fair outcomes.”
The FSA is also considering using its regulatory powers to tackle the significant increase in the number of complaints relating to PPI to the Financial Ombudsman Service (FOS).
The spokesman for the FSA says the upshot of this could be faster redress for consumer who have been mis-sold PPI.
PPI is sold alongside personal loans as a means to protect payments should borrowers be unable to work because of unemployment, accident, sickness or even death.
However, it is not always the most appropriate protection policy, and because many policies are single premium it can be extremely costly adding hundreds or even thousands of pounds to the cost of a loan.
Consumer watchdog Which? is calling for single premium PPI to be banned.
Peter Vicary-Smith, chief executive of Which?, also wants the FSA to do more to stop banks (which sell 80% of PPI policies) selling this type of insurance alongside personal loans.
"[The FSA’s] weak response to date has done little to help the millions of people who may have been mis-sold policies or to improve sales practices,” he says. "Single premium PPI is of particular concern so sorting out this area should be a priority.
“We also want to see the FSA force firms to contact their PPI customers to inform them about the problems with the market, what constitutes a legitimate sale and what to do if they think they were mis-sold their policy."
There is also potential for the FSA to develop a 'redress payments calculator' for PPI that would ensure consumers are adequately refunded, according to Which?
The insurance industry, however, is far from convinced that a PPI witch-hunt is the best thing for consumers.
Nick Starling, director of general insurance and health at the Association of British Insurers, says: "With increasing unemployment and over-indebtedness, it is essential that people protect themselves against losing their regular income. PPI is the only financial product that covers unemployment.”
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.