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Your Money > Credit Cards Articles > OFT slams banks...
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By Naomi Caine Have you got insurance to cover your loan payments? If so, it's probably no good. A damning report into the £5.5 billion market for payment protection cover by the Office of Fair Trading (OFT) has accused insurers of "failing consumers". The OFT Consumers are routinely sold payment protection insurance when they take out a loan or mortgage. The policies are supposed to cover your debt payments if you are ill and cannot work. There's nothing wrong with that, you might think. But you'd be wrong. The sale of payment protection insurance (PPI) is dominated by the big banks, which often foist the cover on customers when they are negotiating loans. Sales staff do not always make it clear that the cover is optional - or that you can buy it from another insurer. The hard sell is perhaps no surprise: sales staff can earn high rates of commission for pushing PPI. High cost of cover The dominance of the banks, plus the high commission rates, make PPI expensive. It can more than treble the interest rate on some loans. Norwich and Peterborough's loan rate, for example, jumps from 8.5% to 26%, according to figures from uSwitch, a comparison website. The higher interest rate bumps up the monthly payments on a £10,000 loan by £78. If that weren't bad enough, some companies automatically add the insurance premium onto the quote for the monthly debt repayments, making accurate costs comparisons difficult. Nick White, head of personal finance at uSwitch, says: "It's not surprising to see that the Competition Commission is now involved in this investigation as the high-street banks currently account for 80% of all PPI policies sold. Consumers are not shopping around and looking at the standalone policies that represent much better value for money." PPI might be expensive, but it is often riddled with exclusions. The claims ratio is estimated at 15% to 20% by the OFT. Compare that with a claims ratio of 74% on motor insurance and 55.2% on household insurance. Paula Houghton, personal finance campaigner at Which?, the consumer group, says: "Bad practice is rife in the PPI market. It is simply not delivering adequate protection for consumers. Policies are complex, often inappropriate and offer poor value." The Financial Services Authority (FSA), the regulator, has conducted its own review into PPI. It is the regulator's second probe into the industry. Last year, it warned companies to clean up their act or face tighter controls. But nothing much seems to have changed. Clive Briault, managing director of retail markets at the FSA, says: "Major weaknesses remain, which go to the heart of the culture surrounding PPI sales. Many firms are still not giving customers clear information. It is not being made clear that PPI is optional and customers are not getting full information about how much the insurance will cost. Customers are still not being made fully aware that there may be parts of the policy under which they cannot claim." The study identified particularly poor standards among firms such as motor dealers and retailers. The FSA has pledged to get tough on the worst offenders, and has threatened stricter regulation of the sale of PPI if the industry does not make improvements. Fears of mis-selling But there are already seven million policies in circulation, which could mean mis-selling on a grand scale. White says: "At best, the excessive cost of PPI for minimal benefits makes it bad value for money. At worst, mis-selling means the most vulnerable people are parted from large amounts of money under false pretences, and left more exposed to debt. This is particularly worrying at a time when personal debt has reached record levels, and continues to escalate." Campaigners want insurers to introduce summary boxes - as adopted by the credit card industry - to ensure that all costs are clear to the consumer and they can make proper comparisons between policies. They would also like to see a ban on the inclusion of PPI in loan quotes, to stop high pressure and unfair sales tactics. However, a clampdown on PPI could signal the end of low loan rates. White says: "The high price of PPI is clearly subsidising the low loan rates on offer. I would not be surprised to find that the knock-on effect of a clampdown on the dubious selling practices and high pricing surrounding PPI policies will result in a steady increase in interest rates." Top tips It could be many months before any changes are introduced by the Competition Commission. In the meantime, consumers should follow some basic tips.
Andrew Hagger of Moneyfacts says: "Companies such as Paymentcare and British Insurance offer similar cover to mainstream lenders at a much reduced cost to the customer, without charging interest on top, or hitting them further in the pocket with poor value rebates on cancellation." |
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