Britain's Biggest Rip-off Gets Worse!

Millions of us have bought overpriced payment protection insurance. Here's how lenders make it impossibly hard to cancel this rip-off cover.

Anyone who has been following the Fool articles for a while will know that payment protection insurance (PPI) is one of our pet hates.

In case you haven't heard, payment protection insurance is optional cover which is sold alongside credit and store cards, mortgages, motor finance, personal loans and other forms of borrowing. If you are unable to work due to an accident, sickness or unemployment, it will meet your monthly repayments until you return to work, usually for up to a year for each claim.

Although PPI appears to offer valuable peace of mind, in reality, it's one of the worst financial products that money can buy. The problem with PPI is that this market is ruled by lenders, which charge as much as they possibly can for this protection. Hence, commissions on PPI regularly exceed 80% (even 90%) of the premiums paid, which explains why these policies cost five to ten times as much as they could.

What's more, PPI policies are often poorly designed and fiendishly difficult to claim against, which makes them as useful as a chocolate teapot! Thus, my warning is simple: NEVER buy payment protection insurance from lenders. Instead, shop around for a stand-alone policy from Best Buy independent providers such as Ant Insurance, British Insurance, the Post Office or table-topping Fool Partner SecurityFirst.

Then again, what if you've already bought an overpriced PPI policy from a lender and wish to cancel your cover and perhaps replace it with a much cheaper alternative? The bad news is that lenders will do everything in their power to stop you from cancelling your existing PPI policy. In my experience, this includes providing you with downright misleading and patently false information!

Let's pick off the most popular PPI policies one by one:

Credit card repayment protection (CCRP)

As these are monthly policies, where one month's premium extends your cover by a further month, they are easy to cancel without penalty. Simply contact your card issuer and order it to cancel your policy immediately. Of course, it goes without saying that you shouldn't take no for an answer -- no matter what 'customer-service advisers' tell you, because they are not acting in your best interests!

Mortgage payment protection insurance (MPPI)

The vast majority of MPPI policies are also monthly, so they can be cancelled with little effort. However, with a typical premium adding up to around £400 a year, mortgage lenders are reluctant to lose the excessive profits which they make from MPPI. Hence, customer-service teams are trained in 'objection handling' techniques in order to discourage you from cancelling your MPPI. Don't give in: instruct them to cancel your policy or, even better, if you have a separate direct debit for MPPI, just cancel this instruction at your bank.

Single-premium MPPI

If you are one of the unfortunate people who have bought a single-premium MPPI policy, then you have my deepest sympathy, because you are in a world of pain! It's clear to me (an eleven-year veteran of the PPI market) that the vast majority of single-premium MPPI policies have been mis-sold. Indeed, I can't come up with a single sensible reason why anyone would be better off with a single-premium MPPI policy, rather than the cheaper monthly-premium alternative!

The good news is that City watchdog the Financial Services Authority (FSA) is clamping down on providers who mis-sell single-premium MPPI cover. As I explained here, in September, Regency Mortgage Corporation was fined £56,000 for mis-selling MPPI, and loans.co.uk was fined £455,000 last month for similar failings.

Therefore, if you have a single-premium MPPI policy, my advice would be to write to the lender or broker which arranged this policy, asking for an explanation why it recommended this particular policy to you. If you're unsatisfied with its answer and have exhausted the firm's formal complaints procedure, you're then free to make a formal complaint to the Financial Ombudsman Service (FOS). Go for it!

Personal loan protection (PLP)

With the honourable exception of the Post Office, almost all personal loan providers sell single-premium PLP policies. With around 6½ million personal loans being taken out each year, PLP is a massive money-spinner for lenders; I estimate that they'll earn up to £4 billion from selling this cover in 2006!

Given that a typical single-premium PLP policy can cost £1,000+, with the largest premiums topping £5,000, lenders will fight tooth and nail to prevent you from cancelling an existing PLP policy. Some lenders, notably HSBC, Northern Rock, Nationwide BS and RBS/NatWest will allow you to cancel your loan insurance separately. However, because your PLP premium is effectively borrowed money, most lenders will insist that you cancel and reschedule your entire loan.

Here are some of the excuses that lenders come up with to deter you from cancelling PLP:

"You can't cancel your PPI without cancelling your entire loan -- and we can't promise to give you a replacement loan."

"You'll have to pay off your entire loan and arrange a new one without PPI."

"You can cancel your cover, but we'll have to rearrange your loan and the interest rate will be much higher on the new loan."

"If you cancel your PPI, there'll be a big penalty to pay, so you won't get back as much as you'd expect."

Frankly, this is hogwash!

When I managed a large PLP scheme for a leading lender, when a customer asked to cancel their PLP, we would write what is known as a "modifying agreement" under the Consumer Credit Act. This allowed us to reschedule a loan without PPI by altering the monthly repayments and/or length of the loan. Why can't other lenders do the same? Have they even heard of modifying agreements, I wonder?

Anyway, several firms have made promises to the FSA to make their policies and practices surrounding refunds on cancelled single-premium PPI policies fairer and more transparent (see here). Then again, given the large number of complaints that I've seen recently, the FSA has a whole lot more work to do!

So, don't be fobbed off when cancelling your existing PPI policies. Stick to your guns and if all else fails, threaten to take the firm to the FOS and report it to the FSA for failing to meet the Treating Customers Fairly principle. Alternatively, send a copy of this article to your lender. With more fines undoubtedly on the way, this will make it sit up and take notice!

More: Buy PPI from SecurityFirst and find low-rate credit cards, personal loans and mortgages!