How to make sure you
THE SCOTSMAN - 3RD FEBRUARY 2007
Payment protection insurance can be a life-saver if someone is struggling to meet repayments on a mortgage, loan or credit card - but only if it is sold appropriately. Payment protection insurance has recently been in the headlines for all the wrong reasons. Only this week the Financial Services Authority (FSA) issued its biggest payment protection insurance-related fine to date. GE Capital Bank had to pay £610,000 for failing to have adequate systems and controls for selling insurance, including payment protection insurance, and not treating its customers fairly.
Part of the problem was that GE Capital Bank sales people were not providing the right information to customers in good time before the sale to enable them to make an informed decision about whether the insurance was necessary or suitable.
Then there came an exposé on the Tonight with Trevor McDonald programme last month that gave an insight into the aggressive sales tactics used by some firms.
Commentators are warning payment protection insurance is set to be the next big mis-selling scandal.
Simon Burgess of British Insurance, an independent provider of payment protection insurance, described mis-selling of the product as one of the biggest consumer rip-offs ever seen in the UK. In his view, high street banks and building societies are the main perpetrators of consumer abuse as they sell their own products rather than shopping around for the most suitable ones for individual customers.
He warned: "I predict around half of the 28 million payment protection insurance policies in the UK have been mis-sold and if claims are upheld, it could cost this sector in excess of £10 billion.
"The Office of Fair Trading, Financial Services Authority and consumer groups have all expressed concerns about low claims ratios, high commission rates, price differentiations and product variations and it won't be long before consumers realise they should be following in the footsteps of those who were mis-sold pensions or suffered endowment shortfalls."
Ian Allison, corporate relations director for BrunelFranklin.com - which offers a claims service for people who think they may have been mis-sold - said: "Firms who used unscrupulous sales tactics to sell payment protection insurance are finally having to pay for the shoddy way in which they mistreated customers. The fines are relatively small when you consider that up to 35 million people may have payment protection insurance and many of them don't even know they've got it. Those who do have it didn't necessarily ask for it or want it.
"We are currently handling a case for a student who was seven months' pregnant when she applied for a loan with a so-called 'leading' high street bank. When she queried the £35 per month payment protection insurance payments, it was made clear to her that the loan offer may be in jeopardy if she didn't take out the payment protection insurance. We are determined to get people like that the compensation they deserve, and at least get their premiums returned - possibly much more compensation than that in certain circumstances."
But rather than shy away from payment protection insurance altogether, the answer is to take advice about what protection would be good for you. Too many people waste money by taking a loan and protection together rather than finding the cheapest loan and then getting a competitively priced protection product from a stand-alone provider.
One such service, launched last summer, is AntInsurance.co.uk. It is one of a selection of companies to offer income payment protection insurance for short periods: three and six months, as well as the industry standard 12 months, to cover any financial outgoing, from a mortgage, to a car loan, to school fees.
Pam Needham, director and founder of AntInsurance, said: "I feel for the poor consumer and the confusion they are in over how to protect their income. After the Trevor McDonald programme the other week we were flooded with enquiries from worried people. Payment protection insurance can work out very expensive as people normally have to pay for a minimum of 12 months' cover, which they might never need. We decided to offer the flexibility of short-term income payment protection insurance and most of the policies we have sold have been for three- or six-month periods.
"But education is a big issue, as many people don't immediately get the concept they can insure a section of their income."
Needham has come across people who have multiple policies, often covering the same things, having taken them out with different loans. Being "over-insured" in this way and can prove expensive.
John Ross, head of independent financial advice at Pagan Osborne, a legal, financial and property specialist in Edinburgh, said: "The additional cost can be horrendous for someone who decides to take out insurance with a personal loan and doesn't realise how much cheaper a standalone product can be. Many clients would put more research into the purchase of a car than loan protection, but they should be looking at both with the same level of detail.
"Instead of going to one insurance product provider, people should go to a dedicated broker who will look at covering all of their income for the appropriate period and consider what policies they already have in place."
Kevin Carr, senior technical adviser at Lifesearch, said: "As with the supermarkets, many banks are tied to one provider and no one provider will ever be the best for everyone. Most banks and mortgage lenders have limited product choice and if you're sure of what policy is the most suitable for you, or if your own circumstances are straightforward, such as poor health or a risky occupation, taking independent advice is the best option."
