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13-09-2005
Payment protection insurance is failing many of those who need it most, adding to their debts instead of protecting them against hard times, a new report from national charity Citizens Advice says today.
The report – published at the start of Advice Week 2005*** - says the insurance sold to cover credit payments in the event of illness or job loss is often very expensive, mis-sold to people who cannot possibly claim on it, and designed to exclude many of the most common situations that can lead to debt problems.
Citizens Advice is making a ‘super complaint’** to the Office of Fair Trading, calling on them to launch an investigation into the payment protection insurance (PPI) business, which has an estimated 20 million policies in force and produces annual revenue in excess of £5 billion.
Protection racket* - based on evidence from 270 Citizens Advice Bureaux around the country - says that in many cases it is more about providing an additional source of profit for the financial industry than about protecting consumers.
Problems occur in nearly all sectors of the consumer credit market – from non-status mortgage lenders and hire purchase companies to major high street banks and credit card companies.
The premium paid can be equivalent to 25% of the value of a loan and has to be paid for by borrowing more. It is common for interest to be charged on PPI premiums in credit agreements. Payment protection insurance on some credit cards can increase the cost of borrowing by around nine per cent a year.
Borrowers are often sold completely inappropriate policies when they take out credit agreements. In many cases high pressure sales or inertia selling are used to force people to take out insurance that they cannot afford, do not want or need, and cannot benefit from.
Policies sold by several well-known mainstream lenders exclude cover for common problems like bad backs and mental health problems that can stop people working. Many also have arbitrary age limits and ban the self-employed and those on fixed-term contracts from making a claim.
Even where people are able to make a successful claim, the amounts paid out do not guarantee to keep them free from debt, particularly credit card debt. Some insurance only pays out for a year, and then only covers minimum payments.
For example, a borrower getting payments from a PPI policy to cover a £1,000 credit card debt could see their debt reduce by just £12 over one year.
Delays in the payment of claims can trigger spiralling debt and administration charges, leading to borrowers being pursued by debt collectors and the threat of court action.
Citizens Advice says that PPI is a particular problem for the most vulnerable borrowers, who are also the people most at risk of running into financial difficulties. Earlier research found that 85% of CAB clients who had claimed on payment protection insurance had been unsuccessful – in sharp contrast with industry assertions that only 15% of claims are turned down.
Bad practice in the sale of payment protection insurance is also often linked to irresponsible lending. CAB advisers report cases where consolidation loans advanced to borrowers already in financial difficulty are rolled over several times, with a new PPI policy sold each time, increasing the debt significantly.
Citizens Advice Chief Executive David Harker said: “Payment protection insurance is sold to borrowers with the promise of peace of mind and reassurance that credit repayments will be covered if they fall on hard times. People are lulled into a false sense of security, only to find that far from providing protection against an unexpected drop in income, PPI often just adds to their debt problems.
“At best the excessive cost for minimal benefits makes it bad value for many people; at worst mis-selling means the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt. This is particularly worrying at a time when personal debt levels are escalating.
“These problems are not new – we first reported on them ten years ago. It is a scandal that in this time so little has been done to remedy them. Selling PPI is big business, and this insurance does not come cheap, so it is high time the industry developed good minimum standards of cover. We badly need an official investigation of how this market is operating, leading to effective regulation that ensures a fair deal for all consumers, and which also protects the most vulnerable.”
Citizens Advice is calling on the Office of Fair Trading to launch a market investigation into the sale of payment protection insurance with credit products. It also wants the Treasury Select Committee to hold an inquiry into payment protection insurance, particularly the costs and incentives involved.
And it is urging the Financial Services Authority to develop a basic PPI policy setting out the minimum acceptable standards with which all lenders should comply. It says there should be a cap on the cost of premiums and no blanket exclusions.
Cases seen by Citizens Advice Bureaux include the following:
A CAB in Cornwall was visited by a woman who had taken out a secured personal loan with her partner. They had since separated and she was now struggling with the repayments. Although the client had signed the application and received a copy, she was unaware that the cost of the PPI premium increased the loan from £17,800 to £22,962, and attracted interest at the same rate.
A CAB in Surrey reported that a client had been sold a loan protection plan although he had long-term mental health problems. An additional £2,200 was added to his £8,900 loan for the PPI. At the time of signing the agreement the client was very unwell and was not aware of what he was signing. The bank was aware of the client’s situation and that the client might not be eligible for the insurance protection policy.
A Northern Ireland CAB reported that a man off work due to ill health sought advice about £21,000 debt, which included three credit cards. The CAB was shocked to discover the cost of payment protection insurance premiums on the credit cards:
This totalled nearly £50 per month on debts of £6,600 - equivalent to an extra monthly interest charge of 0.75%.
A CAB in Worcestershire advised a couple in receipt of income support who were sent pre- approved applications for a credit card with a credit limit of £600. They accepted the card but were then pestered to take out insurance, despite repeatedly saying that neither of them were in work. The credit card provider said that it would provide cover in the event that the card-holder did get a job.
Top tips from Citizens Advice on payment protection insurance include:
- Decide whether you actually need this insurance. It’s costly and may well not be worth it.
- Always read the small print and make sure it’s right for you. Check before signing any credit or car finance agreement that PPI is not included automatically – it should always be optional.
- Check out the common exclusions to make sure that you and all your circumstances are covered.
- When taking out a loan or a credit card over the phone always listen carefully to what you are signing up to.
- Always ask the insurance company for a copy of the payment protection policy, this is either the summary of cover or a certificate
- Check to see if your life assurance is a cheaper way of making sure that a loan will be repaid if you die. Your employer’s sick pay scheme may be enough to cover repayments should you become ill.
- Be aware that insurers can reject claims on the basis of age, self-employment, pre-existing medical conditions, mental health problems and disputes about medical conditions.
- Always check that the insurance will cover the whole debt.
- Make sure you know who your insurer is and how to contact them in case you need to make a claim.
- If you think you have been the victim of mis-selling or find your claim is refused unreasonably, complain using the insurance company’s internal complaints procedure. If you are not satisfied with the response, take your complaint to the Financial Services Ombudsman.
Notes to editors:
*Protection racket – CAB evidence on the cost and effectiveness of payment protection insurance
**A super complaint can be made by a designated group of consumer organisations on a specific issue. The complaint is a request to the OFT or other specified regulator to investigate an issue or a market that the consumer body believes is working against the consumer interest. The OFT or other specified regulator is required to publicly respond to a super complaint within 90 days to say whether:
a) they believe it is an issue – if not, why not.
b) how they intend to deal with it.
This is the second super complaint to be lodged with the OFT by Citizens Advice since the new powers designed to end market abuses were introduced in 2002. The first was about doorstep selling and triggered OFT investigation, leading to tighter controls including improved cancellation rights.
***Advice Week 2005 (12-18 September) is organised by Citizens Advice – the national problem-solving charity and umbrella organisation for all bureaux – as a celebration of the work of the service, to raise funds and to recruit new volunteers.
Notes to editors on Citizens Advice
- The Citizens Advice service is a network of independent charities that helps people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. For more information in England and Wales;
 www.citizensadvice.org.uk
- The advice provided by the Citizens Advice service is free, independent, confidential, and impartial, and available to everyone regardless of race, gender, disability, sexual orientation, religion, age or nationality.
- Most Citizens Advice service staff are trained volunteers, working at over 3,300 locations across England and Wales.
- Advice and information www.adviceguide.org.uk
- Volunteer hotline 08451 264264 (local rate)
- Citizens Advice Guide to your rights, second edition: January 2008 - over 600 pages of practical, independent CAB advice. An invaluable resource for any bookshelf - available from all good bookshops; price £11.99; ISBN: 9780141034089
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