Barclays exposed over huge insurance rip-off
THE GUARDIAN - 6TH MARCH 2004
A major investigation by Jobs & Money this week exposes how Barclays Bank is making huge hidden profits from customers encouraged to take out over-priced ‘add-on’ insurance on Barclayloans, Barclaycard and Woolwich mortgages.
The bank sells the insurance, known as ‘payment protection insurance‘ to customers who fear they may default on their loan, mortgage or credit card debt when they are made redundant or fall sick. The monthly cost of these policies can make up a large chunk of any debt repayments and ill push may low income families further into debt.
Documents see by Jobs & Money reveal that:
• As long ago as 2000-2001 the bank made £240million profit on the policies, enjoying a 70% profit margin on the price paid by indebted customers;
• About one-tenth of Barclays’ total worldwide profits came from payment protection insurance sold to more than 2 million customers in Britain.
• Barclays garners around £350million annually in premiums, yet pays out only around £90 million in claims. The documents also reveal that it rejects one in five claims, although this is less than the industry average. Estimates by Jobs & Money indicate that as few as one in 20 policies result in a claim.
• The bank switched its payment protection insurance subsidiary to Dublin (with a parent company in the Isle of Man) to avoid UK taxes on profits – a move which has also kept it out the public eye.
• Barclays helped set up a special PR spin machine to counter arguments against profiteering on payment protection insurance from both the government’s indebtedness task force and from the press. But its own briefing papers, seen by Jobs & Money, accept that many of its arguments are unconvincing, and begs the banks for better arguments.
There are no industry codes or laws which Barclays is breaching, but the findings come amid widespread criticism about record profits at Britain’s banks, including Barclays, over the past fortnight. Treasury select committee member Norman Lamb, MP, when shown Jobs & Money’s findings, said: It is gross profiteering, absolutely excessive, and deserves to be exposed. People need to be made aware of this rip-off.”
A spokeswoman for Barclays said: “Life all other commercial organisations Barclays will not comment on profitability. However, your claim that payment protection insurance accounts for 10% of group profits is over-inflated and untrue. Barclay’s payment protection insurance is one of the most comprehensive on the market and we believe offers extremely good value for money.”
But industry insiders say that they have suspected for years that payment protection insurance has produced mouth-watering profits. This week Burgesses mystery shopped loan providers and found that nine out of ten of the biggest lenders automatically included insurance cover in the loan quote when first contacted.
“Its not that we mind banks making a profit. What we do object to is consumers being talked into taking out expensive cover that is all too often useless, “ says Sara-Ann Burgess Director Rosamond of Burgesses. Barclays says it complies with the GISC code of conduct and adds that staff were the first to be awarded accreditation by the Council.
A spokeswoman says customers are not required to take out payment protection insurance when taking out a loan. Further, it says prior to completing the loan “customers are provided with a printed summary of cover and a legal agreement which separates the cost of the loan and payment protection insurance to show the customer the different elements of their monthly repayments.
It says: “Our customer satisfaction survey conducted in October 2003 revealed that 92% of customers were happy with the information provided to them at the point of offer.
The documents seen by Jobs & Money reveal that Barclays has an 18% share of what it calls the ‘creditor insurance’ market. If Barclays profitability on payment protection insurance policies is repeated across the banking industry – and there is little evidence that the other banks are charging much less 0 the UK consumers are handing the banks excess profits running into billions on this one product alone.
Payment protection insurance is designed to protect a borrower’s ability to maintain repayment on unsecured personal loans, mortgages and credit cards, if they fall ill or are made unemployed. On an unsecured loan of £5,000 repayable over five years, someone opting for payment protection insurance can easily pay £2,000 more than someone who resisted the pressure. In some cases, repayments on the loan insurance premium can be nearly as twice as expensive as the interest on the loan.
No-one is legally obliged to add payment protection insurance, but according to reports from independent brokers, a range of tactics are used to make the purchaser fell duty-bound to take it out. Customers are frequently given repayment quotes without being told that the figure includes insurance.
The documents seen by Jobs & Money show that Barclays set a target for 70% of all its loans to be accompanied by insurance, with staff strongly incentivised to meet the target.
The actual percentage of Barclayloan customers taking payment protection insurance ranged between 60% and 70% on mortgages 36% and on credit cards 20%.
Another issue is whether buyers are told it is optional. Conditional selling of payment protection insurance in which the offer of a loan is tied to the person also taking out insurance - has effectively been banned by regulators. But there are persistent claims that it remains commonplace.
Maria Stengard-Green, says the counter clerk at Barclays told her quite clearly that because she was taking out a personal loan of £15,000 she had to have the insurance, which eventually cost £7,000.
But Barclays denies it was compulsory, adding that she was sent a summary of her cover, which would have enabled her to take the loan without the payment protection insurance if she wished. Jobs & Money has also seen material showing how management at Barclays itself was so concerned about lack of training of staff, and sales practices which verged on the conditional – tantamount to “no payment protection insurance no loan” – that in 2000 its sent 1800 staff on a payment protection insurance training course.
One way in which a bank earns extra profits on payment protection insurance is that although the ‘protection price’ of a loan is quoted in monthly terms in brochures, it asks the borrower to pay the premium as an upfront fee. The borrower then pays interest not just on the capital borrowed, but on the insurance premium as well. In Barclayloan’s case, this rate can be anything from 7.4% to more than 20% a year.
Another profit source is the money to be made when someone pays of their loan early, which is the case in around two-thirds of unsecured loans.
Under the ‘rule of 78’ used by many lenders, the way the loan insurance is refunded tends to favour the lender. This often results in a large outstanding balance, even after the customer has paid large amounts of interest.
Many customers fail to realise that payment protection insurance can be easily purchased independently as a stand-alone product over the internet, or from brokers at between a third and half of the cost charged by most high street banks. However, Barclays and other banks which sell payment protection insurance argue that their cover is more extensive.
Unsurprisingly, given its importance to banks such as Barclays, the industry has gone to some lengths to counter any negative publicity. In September 1999 this lead to the setting up of Protect, a trade association of 19 organisations with payment protection insurance interests, including the UK’s top 10 creditor insurance companies.
As well as Barclays, members include Lloyds TSB and Legal & General. The group, which has no permanent staff, meets at hotels, clubs and golf clubs. Documents seen by Jobs & Money reveal it internally accepted that its arguments were, in many cases, unconvincing and that it needed help form members to construct a better case for the product and its profit margins.
Despite the large profits Barclays had made on payment protection insurance business conducted almost wholly in the UK, it has legally avoided paying tax by setting up companies in Dublin and the Isle of Man.
Two were set up in 1997 in the Republic of Ireland – Barclays Insurance (Dublin) Limited (BIDL). They make up Barclays Insurance Dublin with the specific purpose of underwriting payment protection insurance policies to UK customers.
What has never been disclosed before is the way that payment protection insurance through Barclays Insurance Dublin, has contributed to the profits of the whole group. This comes in two ways. The first is payment of commission to Barclays from each of the two constituent companies. In 2000, for example, this amounted to £88 million. The second comes from underwriting profits on Barclay’s payment protection insurance. In 2000 this came to £153 million.
Accordingly to evidence seen by Jobs & Money, basing its creditor insurance business in Ireland, was Barclays’ response to the threat of the press nosing around what it, itself, called historically high profits and commissions earned from payment protection insurance. The other reason was to take advantage of the lower 10% rate of corporation tax, a saving to the parent company of around £30million a year.
A Barclay’s spokeswoman says: “Tax and regulatory issues, as well as operational issues, always play a part in deciding upon location. The appropriate local tax is paid in Ireland, the same as all our other subsidiaries pay local tax. UK tax is paid on some of the profits generated for payment protection insurance activities.
Other payment protection insurance companies set up in Ireland include HSBC and Halifax Insurance.
There are wider concerns about whether the policies are necessary at all. According to a November 2002 household survey commission by the DTI “very few payment protection insurance policyholders (4%) had tried to claim in the past 12 months, and 3% said they had done so successfully.” Across the industry, around 25% of claims are turned down.
“Rather than paying for the slight possibility of needing to claim, it may be better to keep the money and reduce debts, says Simon Burgess managing direct of insurance brokers Burgesses.
Regulatory action may now follow Jobs & Money’s disclosures. In December 2003, the Treasury Select Committee’s recommendation in its First Report on the Transparency of Credit Card Charges, asked the Office of Fair Trading to investigate ‘how payment protection insurance is priced and whether the market may benefit from increased competition”.
But in a statement earlier this week, the OFT said it had “So far decided against investigating this market more generally.”
However, Mr Lamb said he was “not convinced by their reasoning”, and did not preclude the possibility of recalling witnesses to appear before the Select Committee.
The Irish accounts also throw cold water on the industry’s claim that they need to build up reserves to pay policyholders in the bad times. Accounts show that relatively small amounts of profits are retained within the Irish companies. In fact, insiders regard the industry as extremely stable.
It is also acknowledged that apart from one year in the early 1990s, payment protection insurance has been unremittingly profitable.
Avoid the payment pain
Anybody taking out payment protection insurance with a high street lender to cover a personal loan, mortgage or credit card is likely to be paying far over the odds.
According to research by Jobs & Money this week banks are charging customer more than double the rate for loan protection insurance than can be obtained from independent brokers. They are also charging a third more for insurance that kicks in to protect mortgages when customers are unable to make payments.
So what can you do? Below we highlight the three different areas of payment protection insurance, how much the major providers chare – and the cheaper alternative to be had if you shop around.
Mortgage payment protection insurance
Mortgage payment protection insurance sometimes call accident, sickness and unemployment pays your mortgage for a limited time, typically 12 months, normally after a deferred period of 30 days, if you can’t work due to accident, sickness and unemployment . But major lenders typically charge between £5 and £6 per £100 of monthly cover for mortgage payment protection insurance adding another £25 to £30 to a £500 monthly mortgage payment.
Yet Market Harborough building society charges only £1.75 for £100 of monthly cover on its own mortgages – one third of the price of the big banks, illustrating how much they are over-charging. The standalone market is the next best thing, and is dominated by Burgesses, which sells full accident, sickness and unemployment cove at £3.95 per £100 of monthly benefit, cutting the cost on a monthly £500 repayment to £19.75.
What’s more, unlike most major lenders, this provides back-day-one benefits meaning that, once you have been off work for 30 days, the benefits are backdated to the first day you didn’t work.
The first three months is also free if you are taking out the product to back a new mortgage or remortgage.
Other standalone policies include HelpUPay from Pinnacle Insurance and Paymentshield from brokers such as Mortgage Arranges.
Paymentshield undercuts the Burgesses premium at £.75 per £100 for full accident, sickness and unemployment cover but does not pay out until you have been off work for 60 days.
Personal Loans
Payment protection insurance on personal loans is where banks earn the biggest margins.
The precise cost often varies according to the credit checked status of the borrower. As a guideline, if you take out a £5,000 loan over three years from Barclays, loan protection insurance will cost £23.57 a month or a total of £848.52 over the three year term, increasing the cost of your loan by almost a fifth. If your credit status is lower, the bill can be a lot higher.
Barclays, is by no means the most expensive. Standard rates at Halifax, Marks & Spencer, NatWest, RBS and HSBC are all higher. HSBC tops the chart, charging £1020.24 over three years.
Not all major lenders are so greedy. The still mutual Nationwide charges a respectable £13.81 per month and total of £497.16 to insure a £5,000 loan over three years.
You can cut costs even further if you buy a stand-alone policy from Burgesses who have a virtual monopoly on this market and sells loan protection cover underwritten by AXA, through a variety of guises.
At a cost of £5.50 per £100 of monthly benefit, this policy means that payment protection insurance to cover the monthly payments of an £5,000 loan over three years would be just £334.08 or one-third the rate charged by the bank.
If the amount of repayment to be insured is lower because the interest rate is lower – such as Nationwide’s – then the entire better.
Credit cards
Payment protection insurance on credit cards, such as Barclaycard, can easily add upwards of £200 - £300 a year to the annual bill of someone who fails to pay off their balance in full every month.
The insurance is sold as ‘peace of mind’ protection, with Barclaycard’s website saying: “If you were to become sick or got mad redundant, the last thing you’d want to worry about is having to find the money to meet your card repayments.”
What it doesn’t tell you is that the Barclaycard scheme is jointly with HSBC, the most expensive of any of the major credit card providers. What it does say is that ‘peace of mind need not come at an extortionate price.” Yet cardholders can buy independent payment protection insurance elsewhere at a fraction of the cost.
At first glance, it looks cheap. As Barclaycard says: “For just 79p for every £100 of your balance outstanding, payment protection insurance could pay 10% of the total amount owed at the time of the incident, for up to 12 months.”
But if someone maintains a debt of around £2000 every month, then the Barclaycard protection is £189.60 a year.
What’s more, policies contain a number of exclusions. Although Barclaycard’s are less onerous that most. Some cards, such as HSBC’s have a waiting period of two months before it will pay out on unemployment.
Barclays and HSBC’s 79p per £100 compares to 72p at Abbey and Co-op bank.
Consumers should bag together all of their payment protections for loans into a single policy and pay for it independently.
For example, Burgesses, allows you to buy a standalone payment protection insurance policy for an annual cost of £5.50 for every £100 of payments to be protected.
