Payment Protection Insurance

The principle of the payment protection insurance (PPI) product sounds fine, in that if a borrower is unable to work due to accident, sickness or unemployment, then they are likely to have difficulty meeting their loan repayments; and failing to maintain payments can have very serious consequences, especially on a mortgage or secured loan. However, not only was the product aggressively sold to customers who did not want or need it, but the product was poorly designed and often very expensive.

Early Concerns about PPI

Which? magazine and The Daily Telegraph newspaper claim to have raised concerns about PPI as early as 1998, but the first real sign that the tide was turning in favour of the consumer came in September 2005, when Citizens Advice made a super-complaint to the Office of Fair Trading (OFT) regarding PPI. The OFT then decided to refer the PPI market to the Competition Commission (CC).

Later in 2005, the Financial Services Authority (FSA) published the first of its 'thematic reviews' into PPI. The FSA visited a selection of firms selling PPI, and found widespread failings. The firms giving greatest concern were investigated further and 24 firms were eventually fined. The FSA made PPI an area of immediate priority when it took over insurance regulation in January 2005.

In 2008, complaints about PPI to the Financial Ombudsman Service (FOS) began to escalate. Those making a PPI complaint to a financial institution often had little joy, but customers were finding that the FOS was taking a different view. The FOS is not a consumer champion: it makes balanced decisions as to whether the customer or the firm is in the right, yet of the PPI complaints handled by the FOS in the 12 months to March 31 2012, 82% were resolved in favour of the complainant. For the 12 months to March 31 2010, this figure was even higher at 89%.

PPI Rule Changed

In January 2009, the CC recommended that lenders should no longer be able to sell PPI at the same time as the loan. This effectively killed off single premium plans. The CC said that very few customers were shopping around for their PPI, and that this was leading to expensive, poorly designed policies being sold.

In May 2011, the major banks admitted defeat in a legal battle with the FSA, forcing them to set aside huge amounts for PPI redress - £5.3 billion in the case of Lloyds Banking Group ñ in the expectation of having to compensate a great many customers.

The FSA could fine companies with unsound sales practices, but was powerless regarding product design. Many PPI policies were single premium plans, with the premium added to the loan amount and interest on the premium paid over the loan term. These policies usually ran for only three to five years, even if the loan was for 25 years, which is standard for mortgages and secured loans. In addition, under the policy terms and conditions, customers wishing to cancel their insurance early often received a very low percentage of the single premium as a refund.

In early 2013, the FSA will be split into two. One of the new bodies will be the Financial Conduct Authority, which will have the power to ban poorly designed products at outset.

So if you think you may have been mis-sold PPI then why not make a complaint, utilizing a claims management firm to help you through that process if you need it?

All information presented in this article is accurate as of February 2013