With more banks and lenders being fined for mis-selling PPI, could this pave the way for claims for compensation?
Regular readers will know that we at the Fool are not great fans of Payment Protection Insurance (PPI). You may even (over the past four years) have heard us call it a protection racket and one of the biggest financial rip-offs, ever. And these names, though harsh, are justified.
Payment Protection Insurance is sold alongside many financial products -- take out a mortgage, personal loan, credit card or credit agreement and you'll no doubt be offered PPI. In principle, it sounds like a good idea. Take it out and should you become unable to work due to illness, accident or unemployment, your payments will be covered for up to a year. And, apart from the case of mortgage PPI, it will pay off your debt if you die.
Unfortunately, due to huge built-in commissions, PPI is hideously over-priced. And to make matters worse, many lenders fail to state that PPI is optional, and simply tack it onto policies. Many have thus sold PPI to people that could not even benefit (such as the self-employed or those with a history of previous illness) - which reeks of mis-selling.
What's more, some lenders take premiums in one lump sum (rather than instalments) without explaining that there are no refunds for early cancellation of the policy, or early repayment of a loan. And some consumers have felt pressurised into taking out PPI in the belief they would be turned down for credit otherwise.
Indeed, PPI premiums have been steadily increasing over the last few years, meaning the 20 million-odd PPI policies currently in force generate annual premiums of around £5.5bn a year -- which analysts reckon equates to more than £200m in profits per lender!
Payment Protection Insurance has been under investigation by both the Financial Services Authority (FSA) and the Office of Fair Trading (OFT). The latter body referred it to the Competition Commission last October after finding that PPI offered consumers a poor deal both in price and cover.
Three firms: Regency, Loans.co.uk and Redcats have already been fined by the FSA for mis-selling their PPI policies. And just this week the BBC reported that the FSA is poised to fine up to ten banks and lenders around £1m each, for mis-selling PPI to customers.
Of course, when you're making profits of £200m a year from PPI, a fine of £1m is hardly going to hurt -- especially if the firms in question are, as many believe, some of the "big names".
What's more (and I don my cynical hat here) we know that if lenders are told what they can and can't earn from one product they tend to simply find a way to take that money from somewhere else.
We only have to take a look at the effect last year's decision by the OFT to cap late payment charges at £12 has had -- so far we've seen increases in the interest rates of overdrafts, credit cards, and hiked balance transfer fees. And many believe that it's only a matter of time before credit card and banking fees are re-introduced.
Indeed, First Direct is set to start charging some customers monthly fees for current accounts from next week! Let's face it -- this won't affect lenders' profits.
However, the FSA's findings could open up a new can of worms. As consumers are now claiming back unfair bank charges, customers who feel they were mis-sold PPI could be encouraged to claim compensation. And this could mean some serious pay-outs if all of those affected claimed. It will certainly be interesting to find out which banks and lenders are fined/disciplined in coming weeks -- assuming the FSA will be "naming and shaming" them, of course.
If you're about to sign a credit agreement, be it for a credit card, mortgage or loan, it's important to remember that PPI is optional -- you don't have to take it out. In fact, we at The Fool are strong believers in avoiding this rip-off insurance altogether! However, if you would prefer to have PPI, shop around for it as stand-alone cover provided from other sources (such as the Post Office) can cost a mere fifth of the price you'd pay through a lender. What's more, you may find other types of cover such as income protection insurance to be a more flexible choice.
The FSA has admitted that it is not convinced that its current rules relating to PPI are giving us the protection we deserve and will be considering whether they need changing. We can expect further details in coming months. In the meantime, its advice on PPI for consumers is:
- PPI is almost always optional; you should not be refused credit if you decide not to buy it.
- Before deciding if you need it, consider your personal circumstances, including insurance and savings.
- If you do take out PPI, make sure you are clear about what you are and are not covered for (e.g. are there any exclusions relating to your employment, medical history etc?)
- Ask before buying if you are uncertain.
- Remember, you do not have to take out PPI from your loan provider -- shop around to compare benefits and prices.
- Check what you will get back if you cancel the policy, or repay the loan early.
Until something changes, we will continue to be ripped off by many lenders flogging PPI. But with more banks and lenders being fined for mis-selling, there could be a case for compensation for many. In the meantime, avoid it -- or shop around!