The Greatest Rip-Off Rolls On!

As the City watchdog fines a lender £1 million for mis-selling loan insurance, we recommend tougher penalties.

Since this website's birth more than ten years ago, we have repeatedly warned borrowers not to buy rip-off payment protection insurance (PPI). Moreover, when I joined The Fool five years ago, we stepped up the pace by declaring outright war against this expensive, poorly designed and widely mis-sold cover. For example, way back in March 2003, I wrote The Perils Of Payment Protection Insurance, a strongly worded piece warning of the dangers of buying accident, sickness and unemployment cover. I wrote this article based on my inside knowledge, having worked in the PPI market for more than a decade until my escape in 2002. In recent years, the mainstream press has caught onto this £6 billion-a-year scandal, with the Daily Mail launching an anti-PPI campaign in 2006. Indeed, PPI is still big news -- just take a look at Thursday's Independent, which slams PPI over its front four pages. The latest news in the fight to make PPI a product fit for purpose is that the City watchdog has fined yet another lender for mis-selling this cover. This time, the Financial Services Authority (FSA) has handed down a £1 million+ fine to HFC Bank, a lending arm of global giant HSBC. This is the largest fine levied for PPI misconduct, so it tops the following table of nine naughty lenders: LenderPPI penalty (£) HFC Bank 1,085,000 GE Capital Bank 610,000 Loans.co.uk 455,000 Redcats (Brands) Limited 270,000 Hadenglen 182,000 Capital One 175,000 Regency Mortgage Corp 56,000 Home & County Mortgages 52,000 Capital Mortgage Connections 17,500 TOTAL £2,902,500 HFC co-operated with the FSA's inquiry, which found that it had failed to ensure that 163,000 borrowers received suitable advice when sold PPI between January 2005 and May 2007. By playing along, HFC had its fine reduced by 30% from the £1,550,000 which would otherwise have been handed over. Thus, by admitting its failings and promising to clean up its act, the lender saved a tidy £465,000. Impressively, HFC managed to hard-sell PPI to three-quarters (75%) of its (mostly low-income) borrowers -- a `penetration' goal which is widely used by PPI providers. My best guess is that as few as one in four borrowers (25%) actually needs the security provided by PPI, so it is clearly being sold with reckless abandon! The fines don't work The problem with FSA fines is that they are, quite frankly, a drop in the ocean. Indeed, they could be viewed as a necessary business expense in the pursuit of enormous profit margins. Indeed, by my reckoning, PPI sellers have shared a total profit of around £35 billion over the past decade! What this means is that the UK's biggest banks -- including the likes of Barclays, Halifax, HSBC, Lloyds TSB and RBS/NatWest -- have each made billions from flogging this lousy insurance. Indeed, I know that, for some banks, PPI contributes up to a tenth (10%) of their entire worldwide profit -- a proportion which is far too juicy to give up without a fight. Hence, even a fine of £10 million or more would hardly put a dent in the profit earned from PPI in a single month. In consequence, despite an ongoing investigation into PPI by the Competition Commission, we Brits are still being taken for a ride by PPI providers. In my view, it's time for heads to roll -- and I can think of a way to make this happen... How to clean out these Augean stables Instead of handing down puny penalty fines to PPI bandits, I'd prefer the FSA to take a different approach. Given that these lenders have shown that they are unfit to sell this product to the public, perhaps a temporary ban on the sale of PPI would do the trick? For example, were the FSA to bar a major lender for selling PPI for, say, three to six months, this would have a devastating impact on the offending company. I imagine that managers responsible for managing PPI would be dismissed, all sales staff would be re-trained, and the company would suffer a painful short-term drop in its profits. No doubt my former colleagues in the PPI market would view this proposal with horror. After all, a six-month ban on the sale of PPI by a major bank would cost it hundreds of millions of pounds, as well as damaging its market share. Nevertheless, I believe that tough action has to be taken against profiteering businesses which rob the British public of £5 billion a year. If a ban isn't an option, then how about ordering the PPI villains to refund in full all premiums collected during the period covered by an FSA enquiry? In other words, order the firm to cancel and refund all PPI policies, with reduced refunds for those who have received claim payouts. That ought to do the trick! (By the way, you can learn how to reclaim mis-sold PPI premiums in Reclaiming Rip-Off Insurance Premiums, which also explains where to find Best Buy PPI to replace existing policies.) Finally, I believe that more than 25 million credit agreements have some form of PPI attached. That's an awful lot of ropey credit cards, car and personal loans, mortgages and other finance agreements. This makes PPI one of the most widely held -- and massively mis-sold -- financial products in the UK today. Therefore, if you don't want to be royally ripped-off, then remember this motto: Just say NO to PPI from lenders! More: Get Best Buy PPI from Fool partner British Insurance [Please replace link!] | The Best And Worst Loans | Avoid This Enormous Rip-Off