Payment Protection Insurance (PPI) guide

ombudsman

Ever wonder what the fuss over Payment Protection Insurance (PPI) is all about?

You've come to the right place. This is our full guide to how PPI works, how the crisis in the way the product was sold unfolded and what the banks will do next.

What is Payment Protection Insurance (PPI)?

PPI is designed to protect borrowers' payments.

The idea is that, just as car insurance protects holders from bumps on the road, PPI protects borrowers from financial scrapes.

If the borrower loses their job, has to take maternity leave or otherwise suffers a loss of income so severe that they can't continue to make repayments on their financial commitment, the insurance promises to cover the payments until the policyholder gets back on their feet.

Defaulting on any form of borrowing has far-reaching consequences. In the short-term it means a fine for missing the payment.

In the medium to long-term the default will appear on credit records visible to future potential lenders and missing payments, especially at a vulnerable time, could lead to the debt mounting even further.

Do I need PPI?

The fact that PPI was mis-sold for so many years doesn't mean that, when it's sold well and appropriately, it can't offer consumers some useful protection.

However, PPI has become so infamous precisely because, over many years, it was sold neither well nor appropriately.

For example, many of those who ended up with PPI policies could never have claimed. Many policies stipulated that those who were self-employed couldn't claim, for example, yet millions paid out for the insurance in any case.

All in all, then, PPI can still be worthwhile but only when borrowers check the following:

PPI mis-selling: a short history

PPI grew into the biggest personal finance story of the last five years through a groundswell of consumer complaints that slowly turned into a torrent that has cost the UK's biggest banks millions of pounds.

Consumer groups started to raise concerns about the product as early as 1998, in much the same way that we talk about products that offer payment in case of ID theft now.

However, solid action wasn't taken until 2005 when the Financial Service Authority (FSA) took over regulation of the general insurance market and issued its first report on mis-selling which concluded that, "the sale of PPI poses a high risk to our consumer protection objective."

In the same year, Citizens Advice issued a supercomplaint about PPI to the Office of Fair Trading (OFT).

That complaint included evidence of:

Opposition to PPI was beginning to grow. In September 2006 through to January 2008, fines for PPI mis-selling were levied against some smaller financial providers by the FSA.

In January 2009, a year after the OFT handed its investigation over to them, the Competition Commission recommended that sales of PPI be banned alongside lending products such as credit cards and loans.

Barclays, with the support of Lloyds group, took the Competition Commission ruling to court.

In May 2010, the Competition Commission won out against Barclays' appeal and could stop the sale of PPI at point of sale.

The rules weren't actually implemented until October 2011, however, so although some banks stopped PPI sales in any case the real PPI story became the FSA.

In August 2010, the FSA published its PPI consultation paper which recommended that banks who had engaged in mis-selling should compensate all the customers who had been sold products using the same methods.

The British Banking Association (BBA), a trade body for all UK banks, appealed against the FSA rules by seeking a judicial review to have them annulled or curtailed.

Meanwhile, consumer groups were continuing to encourage millions of people to claim for PPI premiums, which often added up to thousands of pounds over the course of the borrowing period.

By May 2010, 30% of all cases coming in to the Financial Ombudsman Service, the body which adjudicates when a consumer doesn't accept a complaint they've made through a bank's internal complaints procedure, concerned PPI. The largest complaints group by far for any single product.

However, the BBA's decision to take the FSA decision to a judicial review stopped the reclaiming process in its tracks: every High Street bank except for Santander stopped processing PPI claims.

The real breakthrough for consumers came in April 2011, then, when the banks lost their PPI case and the freeze on claims ended. A month later, the BBA confirmed that they wouldn't take the decision to appeal.

Once that happened, the floodgates for claims were opened: banks apologised and started working through the backlog of complaints, much to the relief of the FOS.

However, the story is far from over. In October 2011, banks admitted they were falling behind on refunds and as we update this article, in early 2014, many claims still aren't settled, although fact that the proportion of spurious or fraudulent claims is ever growing suggests we may be reaching the end of those legitimately harmed.

Unfortunately, however, even having taken the hit of billions in repayments banks have started to capitalise on similar products and often in disturbingly similar ways.

After a long and thorough investigation starting in late 2011, for example, a firm selling ID theft was fined millions by the FSA and, just as with PPI, ordered to pay compensation to mis-sold customers.

See 'the new PPI' below for more information on this and other products.

A short history of... fines for PPI mis-selling

Date Firm Fine/settlement
Sep 2006 Regency mortgage corp ltd £56,000
Oct 2006 Loans.co.uk £455,000
Dec 2006 Redcats £270,000
Jan 2007 GE capital bank £610,000
Feb 2007 Capital One £175,000
Jan 2008 HFG Bank £1,085,000
Jan - Sep 2011 16 firms, 92% market £776 million
(£102m in May/June 2011)
(£19.6bn in Feb 2014)
Jan 2013 The Co-op bank £113,300
(for delaying complaints)

Note that these fines don't begin to cover the true cost of this scandal for the banks.

As we update this article, in early 2014, Lloyds Banking Group estimates that they've lost £10 billion through PPI claims and the associated costs.

Overall, the UK banking industry has spent £22.2 billion on the reclaiming process, around 88% of which was paid out by the biggest high street names.

As PPI has grown more complex these figures have been increasingly hard to calculate. For example, the Lloyds figure includes money they've earmarked for PPI, but may not necessarily need to spend.

Even so, they suggest that this has been, by far, the biggest consumer scandal of recent years.

PPI now

Under the cloud of the mis-selling scandal, it seems unlikely that PPI will ever be sold as widely as it once was.

As we've noted above, the product is still available through a number of providers but new rules for its sale mean that it's unlikely to be mis-sold again.

However, PPI remains a big part of the financial landscape even in 2014.

Claims for mis-sold policies are still rolling in: complaints about PPI are still by far the most common cases the Financial Ombudsman Service (FOS) deals with.

And as long as claims continue so will the parasitic claims management industry, which is using increasingly underhand tactics to 'sell' reclaimed PPI cash.

In addition, low quality PPI-like products continue to cause concern for consumers.

Claims management firms

As soon as the scale of the PPI scandal emerged so did a number of commercial businesses which aimed to profit from it, despite the fact that claiming through the banks and even taking the complaint to the FOS is free and requires no legal knowledge.

The average PPI payout for a mis-sold policy is £2,750 so, assuming that the claims management firm takes its usual 25% fee, consumers who use a claims management firm must pay out £825 of their rebate as soon as they get it.

35% of people applying to FOS between the ages of 25 and 54 do so through private claims management firms and those in the socioeconomic group DE (unskilled workers) are twice as likely to do so, compared to those in the ABC groups.

The youngest (under 25) and oldest groups (over 65) were far more likely to bring a claim themselves.

Moneysavingexpert and Which? have been instrumental in preaching that consumers don't need to use claims management firms in order to get their PPI refunds.

We agree.

However, as awareness about claims firms has increased and claims have started to trail off customers have become harder to come by and that's caused the claims industry to take a nasty turn.

In December 2012, for example, the Advertising Standards Authority (ASA) censured a firm which had sent out spam texts about PPI claims, a problem that regulators are scrambling to fix.

The 'new PPI'

Finally, as we noted above, even in the wake of the PPI crisis, PPI-like products remain.

These deals are like PPI in that they also often sold alongside borrowing and also potentially difficult to claim on or otherwise unsuitable for the consumers who purchase them.

In November 2011, the FSA issued a warning to firms about such products and said that it would take cases of mis-selling very seriously.

However, many consumer groups and other interested parties continue to contend that financial providers are following the letter, rather than the spirit, of such guidelines.

Let's look at a couple of examples.

Repayment Option Plans (ROP)

It was recently revealed that Vanquis makes a large proportion of its profits through selling Repayment Option Plans (ROP), a good example of the 'new PPI-style product.

Like PPI, ROP policies require a single monthly repayment, often as a proportion of the amount borrowed, and claim to offer borrowers protection if they suffer financial difficulty through a change in circumstances.

Unlike PPI, however, the cover takes the form of either a repayment freeze until the end of the difficulties or a payment holiday so that cardholders can skip some repayments without penalty.

CPP's ID theft insurance

Also walking in PPI's footsteps are a firm called CPP. Mis-selling of their ID theft insurance, in partnership with some of the UK's biggest banks, got the company fined and ordered to pay compensation to customers.

The products were sold poorly, the FSA said. Salespeople frequently either overstated the risk of ID theft or outright lied about what the products would cover.

Under a redress deal, the company must pay compensation to customers it dealt with directly - see more on the initial deal here - and banks that sold CPP products alongside their own - for example, by putting customers through to a CPP salesperson when they call customer services - will also have to compensate consumers that were mis-sold.

As we reported here, seven million former CPP customers will be able to claim compensation from February to the end of August 2014.

The redress scheme itself, however, shows that regulators have learnt from PPI: all CPP customers will be entitled to claim and the whole process will end if claims aren't made by an end date, much more organised than what we've seen above.

Find out more about ID theft protection in general here.

The moral of all of this: consumers shouldn't let their guard down yet.

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