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PPI. Protection racket?

By Sarah Modlock

Naughty, naughty finance companies. Money watchdog the Financial Services Authority has started spanking those foolish enough to try to sell unsuitable insurance to unsuspecting customers.

Payment protection insurance or PPI is taken out by more
than 6.5 million people every year when they apply for credit cards and loans. It is designed to cover you if you are unable to pay your monthly payments due to accident, illness, disability or unemployment.

Capital One is the latest big name to feel the wrath of the FSA. It was fined £175,000 this month for mis-selling PPI. The FSA believes 50,000 Capital One customers were not given important information about their PPI policies at the point of sale. They could now be eligible for compensation and the company has written to these customers offering refunds to those who want to cancel their policies.

The name GE Capital may not ring any bells but it's the the credit giant that runs most of Britain's store cards. It was fined a record £610,000 at the end of last month for similar failings. Analysts believe millions of consumers could be due compensation totalling more than £10 billion in what has been described as the biggest scandal since mortgage endowment mis-selling.

Worthless and expensive

The problems start when sales staff talk customers into buying PPI without explaining what how it works or giving them a chance to find a cheaper policy elsewhere - PPI is often expensive. Worse still, policies are notoriously full of exclusions which often make them worthless when they fail to pay out at the time help is most needed.

Most policies do not pay out for the first 30 days and conditions such as back pain and stress tend not to be covered. The self-employed are also usually not covered and many policies will not pay out if you able to do some sort of work - even if it is not the job you normally do. In other words, if you are plumber off work with a bad back, the policy may not pay out if the insurer deems you able to do another job - such as office work or shifts in a fast food restaurant.

The small print is so tricksy that only around one in five policies are thought to actually pay out. Bizarre but true. And a nice little earner for a £5.5 billion industry. So it's hardly surprising that the FSA has launched a crackdown. We can expect to see up to a dozen more fines in the coming months and possibly more big companies named and shamed with rumours that high street banks are among those in the firing line.

'We are determined to see much better practice in PPI,' says FSA's director of enforcement Margaret Cole. 'This fine, and other recent PPI-related enforcement cases, show we will crack down where firms fail to treat customers fairly in this area,' she says. The Competition Commission has also launched an investigation into the PPI market and is due to report in the summer.

But given the size of the profit margins enjoyed for so long by PPI sellers, some are not happy with the size of the fines: 'We feel Capital One has got off lightly in this instance, as the fine of £175,000 equates to just £3.50 per wronged customer over the period from January 2005 to April 2006,' says Nick White of Uswitch. 'Given the cost of PPI on credit cards, this fine will hardly act as a warning to the industry, nor will it make a dent in the fees that Capital One is collecting.'

For consumer campaigners Which? the investigations into PPI are long overdue: 'Which? has said for years that the PPI market performs poorly - offering complex, often inappropriate and poor value policies. It is simply not delivering adequate protection for consumers,' says Pula Houghton, personal finance campaigner. 'Industry measures to give consumers more information will be too little too late for many consumers and are no substitute for treating them fairly in the first instance,' she adds.

When would you need PPI?

When you take out a loan, it's important to consider how would you cope if there were sudden changes in your circumstances which affected your income. If you lost your job unexpectedly, would your credit card bill or loan become a burden you were unable to manage? If you were injured or sick for so long that you had to take reduced pay would you be able to manage your credit card bills?

You could avoid the need for cover if you are sure that someone else - a partner or parent, perhaps - would be able to cover your credit repayments if the worst should happen. There are also other products such as income protection which may provide better cover for your circumstances and be better value for money.

Almost all card issuers give you the opportunity to take out PPI. It can provide peace of mind but it doesn't come cheap and if you decide you need it, make sure you shop around for the best deal. What the sales staff wont tell you is that you do not have to take the PPI offered by the card issuer.

It is crucial to be aware of the pitfalls of PPI. Reading the small print may be dull but it is essential if you want the right cover.

Here's what to look out for:

  • If you are claiming because of illness, the policy may pay out when you are too sick to do your job or specify that you need to be too sick to do any job.


  • The policy may not start to pay out until you have been ill or jobless for two weeks or more.


  • The cover usually lasts a year but could be less.


  • Make sure you know whether the PPI covers the entire balance of what you owe or just a percentage.


  • Some credit issuers may automatically add payment protection. Check your account and ask for it to be removed if you do not need it.


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