Time To Clean Up This Swindle!

At long last, financial regulators are tackling this £6 billion-a-year scandal. Here's how you can help.

Last week, in Fool Fights Rip-Off Insurance, I warned readers of the huge scandal that is payment protection insurance (PPI).

(To recap, PPI is an optional insurance policy sold alongside credit and store cards, mortgages, motor finance, personal loans and other credit agreements. If you're unable to work because of an accident, sickness or unemployment, your policy pays your monthly repayments, normally for up to twelve months. Most policies (except mortgage PPI) also settle your debt if you die.)

You may be surprised to learn that I'm actually quite a fan of payment protection insurance, despite criticising it in print roughly three times a week for past four years! However, while working in the PPI market for eleven years, I witnessed many of the industry's shadiest practices. Hence, after jumping ship to become a financial writer, I embarked on a personal mission to mend the PPI industry and make it fit for consumers.

I'd group the problems with PPI into these four categories:

• PPI is vastly overpriced. Indeed, some lenders take advantage of their captive audience of borrowers by charging premiums ten times higher than those charged by Best Buy policies!
  
  
• The market for payment protection insurance is unfair and anti-competitive. In a nutshell, lenders control the sale and distribution of these policies, because they have exclusive access to borrowers at the point of sale. Indeed, this stranglehold means that lenders are able to enjoy profit margins of 80% to 90% from the sale of this insurance.
  
  
• Policies are badly designed and frequently mis-sold. Other than those for mortgage PPI, there are no specific industry standards governing the design and sale of these policies. Hence, most are packed with packed with exclusions, get-out clauses and loopholes, making it difficult to make a valid claim.
  
  
• Furthermore, this protection is sold using high-pressure (at times, improper and unfair) selling techniques which leave millions of people with inadequate -- even entirely worthless -- cover.

You can learn more about dodgy dealings in the PPI market in The Perils Of Payment Protection Insurance. By the way, to give you an idea of just how fiendishly expensive PPI is, I've trawled the Fool archives to bring you this evidence:

Credit card repayment protection (CCRP): Millions Conned By Card Cover

Mortgage payment protection insurance (MPPI): The Billion-Pound Mortgage Swindle

Personal loan protection (PLP): Loan Protection Comes At A Price

In summary, consumer protection in this market is laughable, so we're all being taken for a ride by the lenders who have the PPI market sewn up. The Motley Fool has led the way in bringing this to the attention of consumers, because we've been making a big fuss about PPI for four years.

Happily, although the wheels of bureaucracy grind exceedingly slowly, the establishment is finally sitting up and taking notice. Since last September, the Financial Services Authority (FSA) has fined four lenders a combined total of £1,391,000 for mis-selling PPI to borrowers. What's more, ten more lenders are under investigation, with multi-million-pound fines rumoured to be in the pipeline.

Alas, even seven-figure fines are a drop in the ocean for PPI sellers, which make a yearly profit of close to £5 billion from flogging this junk. Hence, although these fines hit the headlines and expose the industry's bad behaviour, they make no real impact on lenders' sky-high profits.

Then again, the battle is not over yet, as the Office of Fair Trading (OFT) has just dealt a heavy blow to the PPI swindlers. On Wednesday, it announced that it had decided to refer the entire PPI market to the Competition Commission. The OFT has been examining the PPI market since April 2006 and, having concluded that consumers get a poor deal, it has asked the Competition Commission to investigate further.

Regrettably, although the Commission will undertake a thorough investigation of the PPI market (including inviting evidence from members of the public), any remedies or regulations it recommends will not take effect for at least two years.

Accordingly, despite the combined efforts of the FSA and OFT to bring the PPI market to heel, lenders will continue to take advantage of consumers until 2009 or even 2010. However, there is a simple way for us, the general public, to seize the initiative in the war against poor-value PPI...

Quite simply, I'm going to ask you to do me (and yourself) a favour. When you're looking to borrow money, whether via a new credit card, personal loan, mortgage or other financial contract, please don't buy the PPI offered to you by lenders. As sure as eggs is eggs, it will be five to ten times as expensive as a Best Buy policy.

Also, tell your friends, family, acquaintances and work colleagues about this massive rip-off. Only by spreading the word can we turn the tide against this opportunistic scam and force lenders into giving us a fair deal. In the meantime, check out the Best Buy stand-alone policies offered by independent PPI providers such as Fool Partner SecurityFirst, Best Insurance and British Insurance.

Finally, if you feel that you weren't treated fairly when taking out a PPI policy in the past, then complain to your lender and demand compensation or a refund plus interest. Here's my advice on cancelling your policy and obtaining a refund. If your lender refuses to listen, ask for a final 'deadlock' letter and then take your complaint to the Financial Ombudsman Service (FOS). A referral to the FOS costs you nothing, but the company must pay £360, regardless of the outcome. Hence, there is a financial incentive for companies to settle complaints before they reach the FOS, so don't back down!

Who needs the Competition Commission, when you can be wise and Foolish at the same time?

More: Use The Fool to find the best insurance policies, credit cards, personal loans and mortgages