Payment protection insurance

Payment protection insurance (PPI), also known as credit insurance, credit protection insurance, or loan repayment insurance, is an insurance product that enables consumers to insure repayment of credit if the borrower dies, becomes ill or disabled, loses a job, or faces other circumstances that may prevent them from earning income to service the debt. It is not to be confused with income protection insurance, which is not specific to a debt but covers any income. PPI was widely sold by banks and other credit providers as an add-on to the loan or overdraft product.^[1]

Credit insurance can be purchased to insure all kinds of consumer loans including car loans, loans from finance companies, and home mortgage borrowing. Credit card agreements may include a form of PPI cover as standard. Policies are also available to cover specific categories of risk, e.g. credit life insurance, credit disability insurance, and credit accident insurance.^[2]

PPI usually covers payments for a finite period (typically 12 months). For loans or mortgages this may be the entire monthly payment, for credit cards it is typically the minimum monthly payment. After this point the borrower must find other means to repay the debt, although some policies repay the debt in full if you are unable to return to work or are diagnosed with a critical illness. The period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt.^[3] PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. Careful assessment of what would happen if a person became unemployed would need to be considered, as payments in lieu of notice (for example) may render a claim ineligible despite the insured person being genuinely unemployed. In this case, the approach taken by PPI insurers is consistent with that taken by the Benefits Agency in respect of unemployment benefits.

Most PPI policies are not sought out by consumers. In some cases, consumers claim to be unaware that they even have the insurance. In sales connected to loans, products were often promoted by commission based telesales departments. Fear of losing the loan was exploited, as the product was effectively cited as an element of underwriting. Any attention to suitability was likely to be minimal, if it existed at all. In all types of insurance some claims are accepted and some are rejected. Notably, in the case of PPI, the number of rejected claims is high compared to other types of insurance. In the rare cases where the customer is not prompted or pushed towards a policy,but seek it out,may have little recourse if and when a policy does not benefit them. ^[4]

As PPI is designed to cover repayments on loans and credit cards, most loan and credit card companies sell the product at the same time as they sell the credit product. By May 2008, 20 million PPI policies existed in the UK with a further increase of 7 million policies a year being purchased thereafter. Surveys show that 40% of policyholders claim to be unaware that they had a policy.

"PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade."^[5] with this mis-selling being carried out by not only the banks or providers, but also by third party brokers. The sale of such policies was typically encouraged by large commissions,^[6] as the insurance would commonly make the bank/provider more money than the interest on the original loan, such that many mainstream personal loan providers made little or no profit on the loans themselves; all or almost all profit was derived from PPI commission and profit share. Certain companies developed sales scripts which guided salespeople to say only that the loan was “protected” without mentioning the nature or cost of the insurance. When challenged by the customer, they sometimes incorrectly stated that this insurance improved the borrower's chances of getting the loan or that it was mandatory.^[7] A consumer in financial difficulty is unlikely to further question the policy and risk the loan being refused.

Several high-profile companies have now been fined by the Financial Conduct Authority for the widespread mis-selling of Payment Protection Insurance. Alliance and Leicester were fined £7m for their part in the mis-selling controversy, several others including Capital One, HFC and Egg were fined up to £1.1m. Claims against mis-sold PPI have been slowly increasing, and may approach the levels seen during the 2006-07 period, when thousands of bank customers made claims relating to allegedly unfair bank charges. In their 2009/2010 annual report, the Financial Ombudsman Service stated that 30% of new cases referred to payment protection insurance. A customer who purchases a PPI policy may initiate a claim for mis-sold PPI by complaining to the bank, lender, or broker who sold the policy.^[8]

Slightly before that, on 6 April 2011, the Competition Commission released their investigation order^[9] designed to prevent mis-selling in the future. Key rules in the order, designed to enable the customer to shop around and make an informed decision, include: provision of adequate information when selling payment protection and providing a personal quote; obligation to provide an annual review; prohibition of selling payment protection at the same time the credit agreement is entered into. Most rules came into force in October 2011, with some following in April 2012.

The Central Bank of Ireland in April 2014 was described as having "arbitrarily excluded the majority of consumers" from getting compensation for mis-sold Payment Protection Insurance, by setting a cutoff date of 2007 when it introduced its Consumer Protection Code. UK banks provided over £22bn for PPI misselling costs – which, if scaled on a pro-rata basis, is many multiples of the compensation the Irish banks were asked to repay. The offending banks were also not fined which was in sharp contrast to the regime imposed on UK banks.^[10] Lawyers were appalled at the "reckless" advice the Irish Central Bank gave consumers who were missold PPI policies, which "will play into the hands of the financial institution."^[11]

Calculations

The price paid for payment protection insurance can vary quite significantly depending on the lender. A survey of forty-eight major lenders by Which? Ltd found the price of PPI was 16-25% of the amount of the debt.

PPI premiums may be charged on a monthly basis or the full PPI premium may be added to the loan up-front to cover the cost of the policy. With this latter payment approach, known as a “Single Premium Policy”, the money borrowed from the provider to pay for the insurance policy incurs additional interest, typically at the same APR as is being charged for the original sum borrowed, further increasing the effective total cost of the policy to the customer.^[12]

Payment protection insurance on credit cards is calculated differently from lump sum loans, as initially there is no sum outstanding and it is unknown if the customer will ever use their card facility. However, in the event that the credit facility is used and the balance is not paid in full each month, a customer will be charged typically between 0.78% and 1% or £0.78 to £1.00 from every £100 which is a balance of their current card balance on a monthly basis, as the premium for the insurance. When interest on the credit card is added to the premium, it can become very expensive. For example, the cost of PPI for the average credit card in the UK charging 19.32% on an average of £5,000 each month adds an extra £3,219.88 in premiums and interest.

With lump sum loans PPI premiums are paid upfront with the cost from 13% to 56% of the loan amount as reported by the Citizens Advice Bureau (CAB) who launched a Super Complaint into what it called the Protection Racket.

When interest is charged on the premiums, the cost of a single premium policy increases the cost geometrically. The above secured loan of £25,000 over a 25-year term at 4.5% interest costs the customer an additional £20,221.74 for PPI. Moneymadeclear^[14] calculates the repayment for that loan to be £138.96 a month whereas a stand-alone payment protection policy for say a 30-year-old borrowing the same amount covering the same term would cost the customer £1992 in total, almost one-tenth of the cost of the single premium policy.

PPI claims

Payment Protection Insurance can be extremely useful insurance; however, many PPI policies have been mis-sold alongside loans, credit cards and mortgages. There are many examples of PPI mis-selling, and as a result may leave the borrower with PPI that is no use to them if they came to make a claim. Reclaiming PPI payments and statutory interest charges on these payments is possible in this case either by the affected borrower or by the use of a solicitor or claims management company.

If the borrower at the time of the PPI claim owes money to the lender, the lender will usually have a contractual right to offset any PPI refund against the debt. If there is any PPI value left over, then the balance will be repaid to the PPI solicitor and or the client.

The first ever PPI case was in 1992-93 (Bristol CC 93/10771). It was judged that the total payments of the Insurance Premium were almost as high as the total benefit that could be claimed. A 10-year non disclosure clause was put in place as part of the settlement. After 10 years, a copy of the judgement was sent to the OFT and CAB. Soon after, a super complaint was raised.^[15]

The judicial review that followed hit the headlines as it eventually ruled in the favour of the borrowers, enabling a large number of consumers to reclaim PPI payments.

The result of the first case is that now over five billion so far has been re-paid.

The person responsible for bringing the first PPI case, 20 years ago, has not sought any publicity or financial reward.

Statistics

UK banks have set up multibillion-pound provisions to compensate customers who were mis-sold PPI; Lloyds Banking Group have set aside £3.6bn,^[16] HSBC have provisions of £745m,^[17] and RBS have estimated they will compensate £950m.^[18] Payment Protection Insurance has become the most complained about financial product ever.^[19]

As of 2016, Lloyds Banking Group confirmed that it had included a further £1bn to their compensation pot, which already stood at £16bn. Making them responsible for over half of all the refunds that have so far been paid out to customers.

See also

• Mortgage insurance
• Lenders mortgage insurance

References