Payment Protection Insurance (PPI) - A rip off?

The investigations

The Office of Fair Trading has said that consumers are suffering from overpriced Payment Protection Insurance (PPI). The OFT has referred it to the Competition Commission, on the basis that many consumers are failed by PPI-insurance which gives them a poor deal and often less protection than they think.

The regulator of the entire financial services industry, the FSA, has only been regulating this cover since January 2006. It has come out with the view that some PPI sellers are not treating customers fairly.

"The OFT firmly believes that banks and other mortgage suppliers are taking insufficient steps to improve the situation, but we believe they will not make major improvements to ensure competition in the market.”

The quick reaction

Consumers have been reacting to the consistent bad press by voting with their feet and not bothering with it. Not having any cover can have serious consequences if you get injured or lose your job. Particularly if you have turned down their PPI insurance, banks and other finance suppliers have much less compunction than before in forcing people to sell their home.

Don't hold your breath

PPI won’t be reformed for years. The CC investigation itself will then take many months and its proposals for reform will then take time to be implemented.

The Financial Services Authority (FSA) has confirmed that it has privately warned several PPI firms that their sales methods contravened its ‘Treat Customers Fairly’ principle. As yet the FSA are reluctant to name, shame and fine some of the more aggressive pressure-sellers of overpriced PPI.

What is PPI?

Payment protection insurance is optional cover, which is sold to you when you apply for credit and store cards, car loans and hire-purchase agreements, personal loans, mortgages and secured loans. 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. Some will not cover unemployment. For mor information on types of income
protection and PPI see our guide to income protection insurance.

What is Optional?

Millions of people with credit cards and mortgages have PPI. Many will not know it. You may not realise that you are paying for PPI every month. In theory it is optional. In practice, suppliers sell it by a combination of heavy pressure, and automatically providing it unless you opt out. Many people are so keen to get the mortgage or loan that they are afraid that if they say no, they may be turned away. This should not happen, but as most bank staff are now paid commission for what they sell, customers are heavily nudged to buy it.

Even the FSA says that many firms are not giving customers clear information during the sales conversation. It is not being made clear that PPI is optional and customers are not getting full information about how much the insurance will cost.

The FSA says that customers are not being made fully aware that there may be parts of the policy under which they cannot claim. Furthermore, some firms are still failing to establish that the PPI policies they recommend are suitable because they are not collecting sufficient information from the customer – for example, about any existing cover they possess.
 
The bottom line is that customers should come away from the sale having been given the best possible chance of understanding that PPI is optional, what the policy will and will not cover and how much it costs. 

Lenders are not pointing out that customers can go elsewhere and buy it cheaper. Their lame excuse is that they are not authorised to give advice about other people’s policies. Telling customers they can get alternative quotes online is not product advice, so the lame excuse fails.

The size of the problem

Some 7.5 million new PPI policies being sold each year, and there may be as many as 28 million PPI policies in existence, one for each worker. 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!

What’s wrong with payment protection insurance?

Nothing is wrong with the theory. Nothing is wrong with people making a choice and purchasing cover that suits their needs.

The problem is with cover sold with other financial products. PPI is massively overpriced. Of the £6 billion of premiums collected during 2006, only £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.

You can pay up to ten times as much as you need to for PPI, making it incredibly poor value for money. PPI bought from a high-street bank can be three, five, even ten times as expensive as a separate policy. Nine out of ten PPI policies are bought at point of sale from banks, building societies and other lenders So, lenders control the design, pricing and distribution of PPI policies and, with exclusive access to borrowers, they have complete control of this market. They like the product as it gives them lots of cash an ensures people will pay their loan or mortgage.

Most quotes for personal loans automatically include PPI in the price – a technique known as ‘assumptive selling’. Salespeople use ‘conditional selling’, in which they hint that borrowers won’t get credit unless they also buy PPI alongside it. A lack of information about PPI in marketing literature, documentation and on websites means it is almost impossible for buyers of PPI to fully understand what they are buying – and whether it is suitable for them. You may get literature, but few buyers and most salespeople, will struggle to understand the complex language and what is not covered.

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!

Claim if you can

PPI policies are complex and confusing. Vague policy wordings, literally small print, with lots of get-out clauses, exclusions and jargon galore. There are wide variations in exclusions, plus how and when benefits are paid out.

The OFT say that only about one in sixty policies receives a claim each year. One reason for this is that PPI sold by lenders is a ‘one size fits all’ policy. If you are self -employed, or a houseperson, it is often almost impossible to claim- but you will not know that until too late

Buy it cheaper

You can buy it - if you want it and really need it, for a fraction of the price charged by banks and building societies. You can save a fortune by shopping around for stand-alone PPI. With one or two honourable exceptions, buying PPI from lenders is a huge mistake.

You have a simple weapon to fight back against high-cost, low-value PPI: Shopping around. You won’t find decent PPI cover on the high street, so the best course of action is to shop around online. You will find a number of competitively priced stand-alone policies at a fraction of the price of lenders’ own PPI.

Our advice

• PPI is almost always optional - you should not be refused credit if you decide not to buy it.
• Consider your own personal financial circumstances, including any other insurance cover or savings you already have, when deciding whether you need it
• Make sure you are clear about what you will be covered for and what won't be covered, e.g. any exclusions relating to your medical history
• Ask before buying if you are uncertain
• Shop around to compare benefits and prices
• The purpose of PPI is to protect a borrower's ability to keep up payments on a loan in case of accident, sickness or unemployment. not everyone needs unemployment cover.

There are two routes to alternative cover. Some insurers only sell via financial advisors. But, most advisors sell the product of only one wholesaler- they rarely offer a choice. The main alternative to the banks are the various specialist suppliers. You will not find them in the high street. The vast majority of independent providers now sell mostly or only via the Internet

Stand alone providers, are not perfect. They too can confuse with jargon and technical terms. They work under a substantial handicap as they cannot compete with lenders at point of sale, and the main insurers in the market make so much out of their lender business, that they refuse to offer cover to independents.

• Compare and buy PPI online, and it could save you thousands of pounds over the lifetime of a loan or mortgage.

If you buy from lender you also pay interest on your premiums, often have to pay the total premium up front and will often get penalized if you cancel a policy early.

Further information

• Credit card payment protection insurance
• Mortgage payment protection insurance (MPPI)

A recent study from price comparison and switching website, uSwitch.com, into the ‘true’ cost of payment protection insurance (PPI) found that consumers are definitely paying over the odds - taking out PPI with the big banks in particular, can inflate consumers’ costs by nearly 700%. Some lender policies automatically include life cover, but this could be doubling-up on insurance as you may have your own life policy already.

Lenders are saying that they are listening to complaints and improving their offering. The OFT and FSA do not agree. The lenders will try to keep the status quo as they make vast amounts of money out of PPI.