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Banks' £5 billion payment protection racket exposed!

Citizens Advice is making a "super complaint" to the Office of Fair Trading, calling on it to launch an investigation into the payment protection insurance (PPI) business, which has an estimated 20 million policies in force and produces annual revenue for the finance industry in excess of £5 billion.

Payment protection insurance is failing many of those who need it most, adding to their debts instead of protecting them against hard times, according to national charity Citizens Advice.

The insurance, sold to cover credit payments in the event of illness or job loss, is often expensive, mis-sold to people who cannot possibly claim on it, and designed to exclude many of the most common situations that can lead to debt problems.

Under legislation in place for the last three years, a "super complaint" can be made by a designated group of consumer organisations on a specific issue. The OFT is required to publicly respond to a super complaint within 90 days to say whether they believe it is an issue - if not, why not - and if it is, how they intend to deal with it.

Citizens Advice castigates lenders, claiming, on evidence from 270 Citizens Advice Bureaux around the country, that in many cases payment protection insurance is more about providing an additional source of profit for lenders than about protecting consumers.

Is this really how the banks' protection racket works?

The premium paid can be equivalent to 25% of the value of a loan and has to be paid for by borrowing more. It is common for interest to be charged on PPI premiums in credit agreements. Payment protection insurance on some credit cards can increase the cost of borrowing by around 9% a year!

Borrowers are often sold completely inappropriate policies when they take out credit agreements. In many cases high pressure sales or inertia selling are used to force people to take out insurance that they cannot afford, do not want or need, and cannot benefit from.

Policies sold by several well-known mainstream lenders exclude cover for common problems like bad backs and mental health problems that can stop people working. Many also have arbitrary age limits and ban the self-employed and those on fixed-term contracts from making a claim.

Even where people are able to make a successful claim, the amounts paid out do not guarantee to keep them free from debt, particularly credit card debt. Some insurance only pays out for a year, and then only covers minimum payments. For example, a borrower getting payments from a PPI policy to cover a £1,000 credit card debt could see their debt reduce by just £12 over one year.

Citizens Advice Chief Executive David Harker said, "Payment protection insurance is sold to borrowers with the promise of peace of mind and reassurance that credit repayments will be covered if they fall on hard times. People are lulled into a false sense of security, only to find that far from providing protection against an unexpected drop in income, PPI often just adds to their debt problems.

"At best the excessive cost for minimal benefits makes it bad value for many people; at worst mis-selling means the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt. This is particularly worrying at a time when personal debt levels are escalating."

Simon Burgess, Managing Director of insurance provider Burgesses comments, "The findings reveal that banks continue to profiteer from selling this product and that people are paying a heavy price for failing to shop around. They are succumbing to underhand tactics often used by banks, which include adding the cost of cover to the loan without necessarily telling people they have done so."

If you are looking for peace of mind at the right price you may well find a stand-alone Accident, Sickness and Unemployment (ASU) insurance policy providers better value and higher cover than PPI.

Your Payment Protection Insurance checklist

  • Decide whether you actually need PPI. It's costly and may well not be worth it.
  • Always read the small print and make sure it's right for you. Check before signing any credit or car finance agreement that PPI is not included automatically it should always be optional.
  • Check out the common exclusions to make sure that you and all your circumstances are covered.
  • When taking out a loan or a credit card over the phone always listen carefully to what you are signing up to.
  • Always ask the insurance company for a copy of the payment protection policy, this is either the summary of cover or a certificate.
  • Check to see if your life assurance is a cheaper way of making sure that a loan will be repaid if you die. Your employer's sick pay scheme may be enough to cover repayments should you become ill.
  • Be aware that insurers can reject claims on the basis of age, self-employment, pre-existing medical conditions, mental health problems and disputes about medical conditions.
  • Always check that the insurance will cover the whole debt.
  • Make sure you know who your insurer is and how to contact them in case you need to make a claim.
  • If you think you have been the victim of mis-selling or find your claim is refused unreasonably, complain using the insurance company's internal complaints procedure. If you are not satisfied with the response, complain to the financial ombudsman.

13 September 2005 © Moneyextra.com

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