Is this the end of the road for PPI?
Six of Britain’s biggest banks have announced they will stop selling controversial payment protection insurance alongside loans following a spate of large mis-selling fines.
Alliance & Leicester, Barclays, The Co-Operative Bank, Lloyds, HBOS, and RBS/NatWest have all recently confirmed they will stop selling single premium PPI (where the insurance premium is added to the loan and attracts interest) alongside unsecured personal loans by the end of January 2009.
The Financial Services Authority, which has been investigating PPI, welcomed the move and says it expects other banks to take note and also ditch their personal loan PPI offerings.
The regulator has previously fined several large players for mis-selling PPI, including HSBC and Egg. Back in November, the Competition Commission recommended that lenders should be banned from selling PPI alongside personal loans. Its recent investigation into this type of protection product found that consumers are overcharged or even mis-sold PPI and often find themselves unable to claim if they need to.
Jon Pain, managing director of retail markets at the FSA, says: “We are pleased these firms have stopped selling single premium policies and would expect other firms to notice these developments and review their own positions.
“A PPI product can be helpful for customers wanting protection on a specific credit agreement, as long as the policy is sold appropriately.”
Good for consumers?
Consumer groups have welcomed the move. Louise Hanson, head of campaigns at Which?, says: “These firms have recognised that the party is over for single premium PPI and the rest should follow suit. It is a fundamentally bad product and should be withdrawn from the market altogether.
“People need to protect their finances more than ever so providers should be developing products that meet consumers’ needs and offer value for money. PPI has been widely mis-sold in the past so anyone with a personal loan should check if they have a single premium policy as they could claim their money back.”
Peter Tutton, debt policy officer at Citizens Advice, also welcomes the move and warns that single premium PPI could increase people’s debts rather than protecting them against hard times.
He adds: “We still have concerns about the high price and poor quality of many PPI products, and there is still a long way to go in tackling these problems. Given where we are with the recession, it’s vitally important that people have access to the reasonably priced, effective, good value policies they really need.”
Other experts are concerned that borrowers shouldn’t be deterred altogether from taking out PPI – just as long as it isn’t single premium.
Sean Gardner, director of MoneyExpert.com, says: “The PPI market needs to be reformed but it does still have a serious role to play in the current economic climate; particularly so as the recession tightens its grip.”
Research by MoneyExpert.com suggests that around 30% of people worry they would be unable to meet repayment commitments on personal debts in the future – yet only 26% have PPI attached to their personal loans, while just 37% have covered their mortgages.
“The constant criticism of PPI risks deterring customers from taking out protection against the sadly real risk of unemployment,” Gardner adds.
Peter Staddon, head of technical services at the British Insurance Brokers’ Association, calls for single premium to be outlawed. However, he is concerned that consumers shouldn’t dismiss protection products on loans altogether.
“PPI is a useful product, and consumers need to assess if it is suitable for their individual requirements and need to be aware that cover is available, and often cheaper, from providers other than from where their loan was purchased,” Staddon explains.
“I strongly recommend that individuals looking to purchase this cover contact an insurance broker or intermediary who specialises in PPI rather than choose a policy which is tied to a loan.”
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.
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.