The City watchdog has warned consumers to tread carefully when buying this insurance, while our own whistleblower suggests a consumer boycott.
Yesterday, City watchdog the Financial Services Authority (FSA) published the latest findings of its enquiry into payment protection insurance (PPI).
On the surface, payment protection insurance appears to be an extremely useful shield to protect consumers from misfortune. This optional insurance policy is sold alongside credit and store cards, mortgages, car finance, personal loans and other credit agreements. If you're unable to work because of an accident, sickness or unemployment, your policy pays your monthly repayments, normally for up to a year. Most policies (except mortgage PPI) also settle your debt if you die.
Alas, dig deeper and you discover the true horrors which lurk below the surface of the PPI industry. Here are my criticisms of PPI providers and their products, based on my eleven years in this market:
- 1) PPI is massively overpriced. Lenders routinely charge premiums three, five, even ten times higher than those charged by Best Buy providers!
- 2) Lenders have the market for PPI sewn up, because they have exclusive access to those people who want to borrow. Their iron grip over PPI enables them to collect profit margins of 80p to 90p in the pound. In other words, the PPI market operates as a cartel, which is unfair and anti-competitive. This explains the Office of Fair Trading's referral of the PPI market to the Competition Commission on 7 February 2007.
- 3) PPI is usually promoted using high-pressure selling techniques. At most lenders, the emphasis is on meeting PPI sales targets, not on making sure that policies meet customer needs.
- 4) The majority of PPI policies are poorly designed, which often leaves policyholders with inferior (or even completely useless) cover. These policies are filled with exclusions, get-out clauses and loopholes, which stack the odds against making a successful claim.
Given these industry-wide problems, the FSA has been conducting a ‘mystery shopping' exercise. The watchdog has been looking into selling standards at 150 leading providers of PPI. Its latest review shows improvements in some areas, but warns that many firms are failing to treat their customers fairly.
The regulator found improvements in two of its five key areas of concern. Most firms now make it clear to customers that PPI is optional. Also, firms now give refunds when policyholders cancel single-premium PPI policies. However, there was little or no progress in the remaining three areas. Firms still aren't giving clear information about the product and how much it will cost. They aren't explaining the extent to which customers are eligible for PPI cover and what isn't covered. Nor are they telling customers why the recommended PPI policy meets their particular needs.
Overall, the FSA was extremely disappointed that some firms have made little progress in improving their sales practices. The regulator believes that too many firms are failing to explain how PPI works, what it covers, and how much it costs. In other words, some sellers of PPI aren't even explaining the very basics of this protection to potential buyers, which is disgraceful.
In a nutshell, the industry continues to operate on the principles of ‘one size fits all' and ‘pile it high, sell it pricey', much as it did when I left it in 2002. In particular, the FSA identified serious failures in the sales process of providers selling single-premium personal loan PPI.
There's some bad news for homeowners, too. All of the major mortgage lenders are absolutely scamming their borrowers by charging them around £6 a month for £100 of mortgage PPI. In reality, the true monthly cost of this cover is little more than £2 per £100. Hence, mortgage lenders are fleecing homeowners of as much as £1 billion a year. Ouch!
The good news is that the FSA intends to strengthen its actions against firms who fail to sell PPI properly. Four firms are currently under investigation and twenty providers face further scrutiny. Furthermore, eleven firms have stopped selling PPI either permanently or temporarily until their sales processes are in order. Three firms have cancelled their FSA authorisation to sell PPI, and four large firms are reviewing past PPI sales to ensure that they were appropriate.
The FSA will continue to conduct company visits and mystery shopping in the PPI arena, and intends to increase fines on those firms who continue to flout its rules. Where standards fall below the required level, the FSA will seek to punish offenders in order to act as a deterrent to other PPI players. It has already fined five firms, with penalties ranging from £56,000 at Regency Mortgage Corporation Limited to £610,000 for GE Capital Bank.
I've been blowing the whistle on the PPI market ever since I quit it five years ago. Knowing what I know about the industry's sins, I'm extremely frustrated with the pace of change, even though I know that regulators always move very slowly. However, the simple fact is that consumers are being conned out of £6 billion a year while the watchdogs twiddle their thumbs. To me, this is nothing short of scandalous!
Until the payment protection insurance industry gets its act together and starts treating customers fairly, I'm strongly in favour of a consumer boycott of all rip-off PPI. In other words, I'm urging you all never to buy PPI from a lender. Instead, always shop around for Best Buy cover online or via a reputable insurance broker. Otherwise, you may as well make a bonfire of fivers in your back garden!
PS: One of the leading independent providers of payment protection insurance is Fool partner British Insurance. I've been a fan of this firm for many years, both during and after my time in the PPI field. Hence, I'm happy to give it my personal recommendation, which should count for something!
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