What is Payment Protection Insurance?

Payment protection insurance (sometimes called “loan protection” or abbreviated as “PPI”) covers a loan or debt repayments in the event of certain problems – for example, if a borrower is unable to work because of illness, or if a borrower is made redundant.

Payment protection policies are often sold as part of the deal when consumers take out a loan, mortgage or credit card. But it is also possible to buy a “stand-alone” payment protection policy from an insurance company – which has no direct involvement with the loan, mortgage or credit card covered by the policy.

What is the "Scandal"?

On 13 September 2005 the Citizens Advice made a Payment Protection Insurance (PPI) super-complaint about four main areas of concern for the OFT to consider:

• consumers pay an excessively high price for PPI
• the protection consumers buy is partial, with many policies unreasonably excluding common causes of credit default
• consumers are frequently mis-sold PPI, with evidence of high pressure and unfair sales tactics
• the administration of PPI claims can be slow and unfair, and can leave consumers facing additional charges or serious debt enforcement action.

As a result of this super-complaint, on 19 October 2006 the OFT announced its proposal to refer the UK market for PPI to the Competition Commission for a market investigation. In February 2007 the OFT report into the reasons for its referral noted:

“The PPI market is large with over 6.5 million policies purchased every year worth over £5.5bn in 2005. PPI can provide worthwhile cover against unforeseen events that cause repayment difficulties and it can offer valuable peace of mind whether or not a claim is made. But, while some of the evidence might suggest a degree of consumer satisfaction with aspects of the product, we are concerned that when the evidence is examined holistically, a less rosy picture emerges with many consumers getting a poor deal.”

On 29th January 2009 the Competition Commission issued a 300 page report and concluded there “were serious deficiencies in the competitive process for selling PPI policies, and, in order to remedy the adverse effects identified, a package of remedies would be required.”

Following the report the Financial Services Authority (FSA) announced a package of tough measures to protect consumers in the Payment Protection Insurance market and ensure they are better treated when buying PPI or complaining about it.

This also resulted in the FSA taking action against 22 firms over poor PPI sales practices.  This includes the FSA’s largest fine in the retail sector on Alliance & Leicester which was fined £7m in October 2008 for serious failings in its telephone PPI sales.

What does this mean to borrowers and their agents?

The natural conclusion from the many reports, statements and referrals by the Citizens Advice, OFT, Competition Commission, Financial Ombudsman Service and FSA is that borrowers who have had a single PPI premium added to their loan or mortgage have a potential claim for redressal from their lender.

Many 100,000s of borrowers have already successfully re- claimed the PPI premiums and related interest they have paid from lenders and many 1,000,000s more potentially have a valid claim.

Elsworth Associates’ experience is that redressal amounts average just between £3000 and £4000 for successful claims – so represent a significant benefit for borrowers.