Exposed: the banks’ ‘protection’ racket
THE DAILY MAIL - 1ST MARCH 2005
Watchdogs spotlight the £1 billion-a-year scandal of loan payment protection insurance that doesn’t even cover some borrowers.
Damning new evidence will be revealed tomorrow of the scandal engulfing lenders over the £1 billion-a-year sales of loan payment protection insurance. Real Story on BBC1, presented by newsreader Fiona Bruce, highlights the shabby way lenders sell this insurance with unsecured personal loans. It also reveals the high cost of policies and how unsuitable they are for many buyers.
Payment protection insurance is sold as a financial safeguard. The aim is to give borrowers the security of knowing their repayments will be met if they lose a job or cannot work due to long-term illness.
As well as being sold alongside loans, payment protection insurance is also sold with mortgage and credit cards. These policies are sometimes known as accident, sickness and unemployment plans. Occasionally, policies include critical illness cover.
Experts say about 20 million policies are in force and sales have topped more than £6 billion in the past five years. The biggest sellers are banks and building societies.
Yet, as the hard-hitting programme confirms, many lenders are selling payment protection insurance to people for whom the policies are worthless. Examples include the self-employed, contract workers, students or people with known medical conditions, none of whom are eligible to claim.
Real Story highlights the case of a company director who was sold payment protection insurance – but when she tried to claim, she was told she was not eligible because of her work circumstances.
With premiums invariably added to the loan, racking up extra interest, payment protection insurance is also punishingly expensive. A £7,500 unsecured loan over five years from Marks & Spencer Money would cost £147.98 a month without cover. With payment protection insurance, payments jump to £179.53. over the full term, payment protection insurance premiums would cost £1,893. according to the programme, some lenders are making even more money form payment protection insurance sales when customers are encouraged to top up an existing loan – to fund a holiday or pay for home improvements, for example.
When the loan is increased, payment protection insurance is charged again, not just on the top-up loan but on the entire outstanding sum. In other words, borrowers pay twice for payment protection insurance cover on a big slice of the loan. Another failing identified by the programme is that payment protection insurance pays out for only a limited period, typically 12 months. So borrowers are left unprotected after cover runs out, regardless of whether the loan is still in place and monthly payments have to be made.
Advertising executive Andy Miller knows all about the pushy techniques used by banks to boost sales of payment protection insurance.
He asked several High Street banks this year, including NatWest, HSBC and Lloyds TSB, for a loan to help him set up a company. They told him that a loan would not be offered unless he bought payment protection insurance, though it would have added £150 to monthly repayments.
Andy,33, says: ‘I had a hip replacement in January. This, and the fact that I was a start-up business, was sued as an excuse to foist payment protection insurance on me. I couldn’t afford £150 more a month on repayments.’
Andy, of Ellerton, North Yorkshire, contacted Burgesses, the internet insurer that offers stand-alone payment protection insurance policies. He was told that even if he had taken out payment protection insurance with the banks, he would not have been covered on two fronts: first, because he is self-employed and second, because of his medical history.
Instead, he took out an income protection policy, which costs him £30 a month and guarantees an income of £1,000 a month if he cannot work because of long-term illness.
Both the Financial Services Authority and the Office of Fair Trading are investigating the shady world of payment protection insurance sales.
Richard Mason, director of price comparison service moneysupermarket.com, appears in Real Story. He is concerned that lenders are failing to make it clear to borrowers that payment protection insurance is not compulsory when they take out a personal loan.
‘In many cases, loan repayments are automatically quoted with payment protection insurance included, but the fact that borrower can say no to such insurance is not made clear,’ he says.
‘It is an expensive insurance and, for a large number of borrowers, worthless.
‘Those who want cover would be better off taking a standalone payment protection insurance policy at about a fifth of the cost of plans sold through banks and building societies.’
Mike Taylor of Which? agrees. The consumer group has long campaigned for action over the way payment protection insurance is sold.
‘Despite new FSA regulations in January aimed at protecting consumers, we are concerned that payment protection insurance is not being sold correctly,’ he says. ‘The FSA should make sure that advisers are explaining payment protection insurance properly.
‘It should be made clear to borrowers exactly what the insurance will add to the overall cost of the loan so they can make an informed decision about whether to take it out.
‘Most people would be better off without it.’
