Times, September 24, 2005
FSA threatens to clamp down on PPI mis-selling
THE Financial Services Authority, the chief City watchdog, threatened the insurance industry with a regulatory clampdown unless it stopped misselling payment protection insurance (PPI) yesterday.
Clive Briault, the FSA’s managing director for retail markets, said that selling practices were in some cases “very poor”.
He said that unless banks, credit card companies and insurance brokers improved their standards, the FSA could impose new rules on the selling of PPI, which has been slammed as “a £5 billion protection racket”. Consumers are frequently unfairly pressured into buying PPI when they take out loans or credit cards. Terms aren’t properly explained. Many customers are persuaded to buy even though their circumstances, for example selfemployment, preclude them from being able to claim.
The margins are huge. PPI can add £1,000 to the cost of a £5,000 personal loan. Barclays is estimated to make a fifth of its profits from PPI.
Mr Briault said: “We are determined to improve standards in this market and intend to publish in November examples of good and bad practice so that firms know what we expect from them.”
Sellers of PPI could be forced to disclose more on pricing, on policy exclusions and on alternative sources of PPI, he said.
Mr Briault also hinted that the competition authorities might act. He referred to new Competition Commission measures, announced last week, for the sale of PPI linked to store cards. Citizens Advice last week issued a semi-official “super-complaint” to the Office of Fair Trading after unearthing evidence of a widespread mis-selling scandal. The supercomplaint could lead to a formal inquiry.
The FSA stressed that its preferred remedy would be for the industry to improve its own standards. It also said that any changes to regulations would have to be justified by costbenefit analysis.
The FSA is also investigating the selling of critical illness cover. It said that it had uncovered evidence of scaremongering tactics in advertising.
Mr Briault announced plans for a review of the regulation of general insurance, which came under the FSA’s aegis in January, with 11,000 firms regulated. The review, beginning next April, would examine whether the regime is working effectively. Initial findings would be published next year.
The Association of British Insurers said that the regime was working well. The British Insurance Brokers’ Association said that some of its members were concerned about the additional compliance costs.
Times, November 27, 2006
Banks reach the last chance saloon over PPI profits
British banks and insurers have all but abandoned their fight to prevent an anti-monopolies crackdown on one of their most lucrative products. Most admit privately that the payment protection insurance (PPI) industry, which earns them excess profits estimated at anything between £1 billion and £3 billion a year, is going to be hit severely.
The industry has until Thursday to make submissions to the Office of Fair Trading, a deadline that represents the last chance to abort a planned reference to the Competition Commission.
However, according to Stewart Dickey, a director of the British Bankers’ Association, “the OFT have made it pretty clear their mind is made up”.
A crackdown could affect some of Britain’s biggest blue chips. Aviva, Royal Bank of Scotland, Lloyds TSB and HBOS are the biggest providers by gross written premiums. Barclays and HSBC are also important suppliers, according to research for the OFT by the consultants London Economics.
Yet smaller rivals could be most vulnerable, according to research by Keefe Bruyette & Woods, the stockbroker. Mark Thomas, an analyst, believes that the Prudential-owned Egg is the most exposed, with PPI providing most of its profits.
The big high street banks each make profits of about £200 million to £250 million from PPI, according to Mr Thomas, but the damage from any clampdown may be reduced because they could be able to offset the pain by fattening margins in related products.
At present profits from PPI offset the poorer returns from the loans that the PPI policies protect. If the banks cannot continue to make wide margins from PPI, they will raise their interest rates on personal loans and credit cards, Mr Thomas predicted. They may also tighten lending criteria, thus reducing bad debts.
Last month, the OFT said that it was minded to refer the industry to the Commission, arguing that consumers were being failed by the industry, which gave them “a poor deal and often less protection than they think”. A final decision will be made early next year, probably in February.
About seven million PPI policies are sold each year, usually alongside personal loans, credit-card deals, mortgages and high-value credit purchases on cars or furniture. Borrowers with PPI get their interest bills paid in the event of a loss of earnings because they fall ill, have an accident or lose their job.
However, consumer groups, the OFT and the Financial Services Authority (FSA), which has also conducted two investigations into the industry, argue that consumers are badly served by the industry.
Citizens Advice sparked the OFT investigation last year, tabling a “super-complaint” and lambasting the industry in a scathing industry report.
A crackdown by the Competition Commission could take many guises. “There is no magic bullet,” the OFT argues, suggesting that the commission would need to apply several measures in conjunction.
The nuclear option would be to separate the credit sale from the PPI sale. That would force borrowers to seek a different PPI supplier, which would be inconvenient and might deter borrowers from taking out PPI altogether.
Less radical would be to apply a delay to the sale of PPI by lenders. Borrowers would have to be approached at a later date about purchasing PPI.
Softer measures could include demanding certain information on sales literature, for example warnings spelling out that PPI was not compulsory or comparative price tables.
Tougher sanctions against salespeople found guilty of mis-selling PPI is another option, with the FSA taking a stronger role.
The industry argues that it is already taking steps to give consumers a better deal and to make the sales process more transparent.
According to Mr Dickey, insurance cover is being increased in some cases for the same premiums and providers are making their policies and sales literature clearer.
He also points to reforms in the Consumer Credit Act 2005, which forces borrowers to sign separately for PPI and, in theory, makes them understand that the two purchases are separate.
Yet short of a very surprising U-turn from the OFT, it looks like too little, too late.
Times, December 21, 2006
Payment protection insurance (PPI) is designed to cover loan, mortgage or credit-card repayments if borrowers become ill or lose their jobs.
But taking out cover of this kind alongside a credit card or loan can inflate the cost of the borrowing by up to 694%, according to Uswitch, a price-comparison website.
It found that someone taking out a £10,000 loan could pay up to £4,453 more over a five-year term if they took out PPI, pushing their monthly payments up by as much as £74 each.
Nick White of Uswitch said: “PPI can greatly increase the amount you pay to borrow money, whether it be in the form of a loan, a credit-card debt or a mortgage.
“Not only is it often very expensive, but some providers also add the cost of the insurance to the total amount borrowed at the start of the term and then charge interest on it.”
Critics also argue that many lenders, keen to boost profits by selling expensive PPI policies, market them too aggressively.
A survey by Moneyfacts, a data analyst, found that more than half of those who have taken out a loan or a credit card from their bank feel they were pushed towards taking out insurance alongside these products.
Emma Butler of Moneyfacts said: “Providers encourage staff to cross-sell PPI because it is a great source of revenue and this leads them to be ‘pushy’ rather than considering the needs of the customer.”
Research also shows that the cover, which is littered with exclusions such as no payouts for the self-employed and those who have to give up work due to bad backs or mental illness, is often sold to people who would not be able to make a claim anyway.
David Harker, chief executive of Citizens Advice, which in September issued a so-called super complaint about PPI, said: “At best the excessive cost, for minimal benefits, makes this type of cover poor value for many people. At worst, mis-selling means that the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt.”
Not all PPI policies are equally expensive, though.
The stand-alone cover available from a number of insurers can often be much cheaper than that offered by banks and credit-card companies — not least because you can take out one policy to cover all your debt commitments.
Uswitch’s figures show that a five-year, £10,000 loan through Bank of Scotland (BoS) would cost £11,661.05 without PPI, or £16,114.40 with it. A borrower taking out insurer Paymentcare’s PPI to cover the same loan, however, would pay just £641.40 over five years — £3,811.95 less than with BoS.
Butler said: “PPI can be a valuable insurance for some consumers and is something that should be considered when taking out a loan or credit card. However, stand-alone cover from the likes of britishinsurance.com and paymentcare.co.uk is often cheaper and more flexible.”
The OFT’s findings on PPI will be published later this year.
February 8, 2007
Payment protection sellers forced to take cover
The Competition Commission has been asked to investigate the payment protection insurance industry over unfair sales practices and excess profits
The £5.5 billion payment protection insurance (PPI) industry was referred to the Competition Commission yesterday for a full investigation.
The Office of Fair Trading said it suspected that consumers, who buy 6.5 million PPI policies each year, were getting a poor deal through bad terms and unfair sales practices.
It has been estimated that banks, insurers and their agents make at least £1 billion in excess profits because of a lack of competition in the industry.
The commission, which expects to take 18 months to complete its inquiry, will impose restrictions on the industry to increase competition if it deems them necessary. John Fingleton, chief executive of the OFT, said: “Despite some evidence of a degree of consumer satisfaction with aspects of the product, the evidence as a whole suggests consumers get a poor deal.”
The OFT overruled a last-ditch effort to prevent mortgage PPI from being included in the investigation, triggering a protest yesterday from the Council of Mortgage Lenders.
The British Bankers’ Association called the inquiry unnecessary, arguing that the adverse comments about PPI might deter those customers who needed it most.
Consumer groups welcomed the move, which was sparked by a “super-complaint” from Citizens Advice. It said yesterday that it was pleased, but called for swifter action. Its complaint was lodged in 2005 and the earliest the commission will act is mid 2008.
Which?, the consumer advice group, said of the referral: “This is clear evidence of an industry that is systematically dysfunctional. It confirms our view that expensive PPI products, often not fit for purpose, are being consistently mis-sold.”
There was a reprieve for the high street when the OFT exempted store card PPI from the new inquiry, because it was subject to new restrictions from May 1 in the wake of a prior commission investigation into storecards.
PPI is an insurance product in which policyholders get interest on their debts paid off if they lose their income because of unemployment, accident or serious illness. It is sold alongside all kinds of debt, from credit cards and storecards to personal loans and mortgages. However, PPI buyers rarely shop around, allowing providers to charge high premiums. For every £1 collected in PPI premiums, just 20p is paid out in claims.
Moreover, agents sometimes use high-pressure sales tactics to persuade people to buy PPI, often selling to those ineligible to claim because they are too old or self-employed. Administration of claims could also be slow and unfair, the OFT ruled, The FSA is cracking down on mis-selling of PPI, last week fining GE Capital Bank £610,000 for failing to train and supervise properly 300,000 shopworkers selling its storecard PPI.
PPI’s LOW PAYOUT RECORD
Amount paid in claims for every £1 collected in premiums:
Mortgage PPI ....................................... 33p
Unsecured personal loans PPI ................18p
Storecard PPI ....................................... 12p
Credit card PPI ..................................... 14p
Secured loan PPI .................................. 16p
Average for all PPI ................................. 20p
Payout on other forms of insurance
Comprehensive motor insurance ............. 82p
Household insurance ............................. 54p
Pet insurance ........................................ 72p
Medical insurance .................................. 80p
Source: Office of Fair Trading
February 4, 2007
The biggest scandal since endowments
Consumers could be in line for £10 billion in compensation from firms that sell useless loan insurance, writes David Budworth
(Francesco Guidicini)
Lisa Green, 25, unwittingly took out PPI
Millions of people who were sold dodgy insurance by banks, high-street stores and car dealers could be due compensation of more than £10 billion in what is being described as the biggest scandal since mortgage endowment mis-selling.
The Financial Services Authority (FSA), the City regulator, last week slapped a record £610,000 fine on GE Capital, which runs the store cards of chains such as Debenhams and House of Fraser, over the sale of so-called payment protection insurance (PPI).
This is supposed to cover your mortgage, card or loan if you are unable to work because of accident, sickness, or you lose your job, but it is expensive and riddled with exclusions.
The move against GE was part of an investigation by the FSA that is expected to result in fines for other big companies. Insiders say that high-street banks such as Lloyds TSB could be next on the hit-list, possibly before the end of this month, opening the floodgates to millions of compensation claims.
Simon Burgess, the managing director of British Insurance, said: “Around half of the 28m PPI policies in place could have been mis-sold, and if claims are upheld it could cost this sector in excess of £10 billion.”
About 7m PPI policies are sold every year by banks, building societies and other providers of loans, mortgages and credit cards in an industry worth £5.5 billion. High-street stores and car dealers also push the cover to customers.
It is one of the last big money-spinners for the banks: Lloyds TSB and Alliance & Leicester are thought to make about 14 per cent of their profits from the sale of the policies, according to Credit Suisse First Boston, an investment bank. PPI is also highly lucrative for Northern Rock, Barclays and Halifax.
The insurance can increase the cost of your loan by thousands of pounds. Royal Bank of Scotland came out most expensive in a survey of 10 major lenders by British Insurance. PPI will add £3,586 to the cost of a £10,000 loan over five years.
However, many policies exclude conditions such as back pain and stress and do not pay out if you are self-employed.
Policyholders often fail to realise they are excluded until they come to claim because the small print is rarely explained at the point of sale, even though the cover has one of the poorest payout records in the industry: only 20 per cent of premiums are paid out in claims compared with 80 per cent for car insurance.
Redcats fined in FSA blitz on mis-sold payment protection
The Financial Services Authority is pursuing a dozen firms for mis-selling payment protection insurance (PPI), its chairman revealed yesterday as it imposed a £270,000 fine on one of Britain’s biggest home shopping groups.
Redcats, the home shopping division of PPR, the French retail group, was ajudged guilty of serious failings that led to about 160,000 customers being sold unsuitable PPI.
Best known in Britain for its Empire Stores catalogue and online brand, Redcats was found to have serious weaknesses in its systems, controls and levels of staff training.
Customers who were sold PPI were not properly informed of exclusions and limitations in the insurance cover, nor were their personal circumstances properly assessed by Redcats’ sales staff.
In more than 3,000 cases Redcats failed to find out how old customers were, even though those over a certain age were excluded from cover. A total of 160,100 customers were sold PPI that may not have been suitable, the FSA concluded.
Sir Callum McCarthy, the FSA chairman, told The Times that the Redcats case was one of a dozen PPI cases being investigated by the regulator’s enforcement division.
PPI is under intense scrutiny by financial and competition regulators amid concerns that the £6 billion-a-year industry, although profiting banks and insurers, is not serving consumers. Policyholders with PPI have their interest and principal payments made if they lose their jobs or have to spend time in hospital. However, there are many exclusions, and these are not always clearly explained to customers. For every £1 paid in premiums only 20p is typically paid out in claims, an egregiously low claims rate that has led the Office of Fair Trading to suspect profiteering. It is expected to refer the industry to the Competition Commission early next year.
Redcats has been ordered to examine past sales for suitability and, if necessary, pay compensation.
The fine would have been £386,000 but for the co-operation of Redcats and its willingness to settle early, which qualified it for a 30 per cent discount, the FSA said.
Redcats, a sister company to Gucci and Yves Saint Laurent, said that it had co-operated fully with the FSA and had invested heavily in improving its compliance systems.
Margaret Cole, head of enforcement for the FSA, said that PPI was “an FSA priority” and promised that more cases would follow as she also publicly censured Eastern Western Motor Group, a chain of franchised car dealers in Scotland and the North East, for PPI failings. It failed to keep proper customer records or clearly state prices when selling PPI to cover car finance agreements.
Two other firms, Regency and Loans.co.uk, have also been fined for deficient PPI selling practices.