The biggest scandal since endowments
THE SUNDAY TIMES - 4TH FEBRUARY 2007
Consumers could be in line for £10 billion in compensation from firms that sell useless loan insurance, writes David Budworth
Millions of people who were sold dodgy insurance by banks, high-street stores and car dealers could be due compensation of more than £10billion 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.
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 payment protection insurance policies in place could have been mis-sold, and if claims are upheld it could cost this sector in excess of £10billion."
About 7m payment protection insurance 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% of their profits from the sale of the policies, according to Credit Suisse First Boston, an investment bank. Payment protection insurance 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. Payment protection insurance 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% of premiums are paid out in claims compared with 80% for car insurance.
Lisa Green, 25, unwittingly took out payment protection insurance when she bought clothes on Littlewoods' website on interest-free credit.
She was shocked when, a few months after opening her account, she looked at her statement and discovered that she was paying £6 a month for something called Extra Care Advantage. When she phoned Littlewoods to ask what this was it turned out to be payment protection insurance and she cancelled it immediately.
She said: "I haven't lost a vast amount of money but I had no idea I was paying it until I took a close look at my statement. As I'm self-employed I would be unlikely to be able to claim on it so it was money down the drain."
Despite Green's surprise, Littlewoods said that customers had to opt for payment protection insurance and that it was not automatically added to an account.
But millions are believed to have had cover forced on them by high-pressure salesmen. Douglas Wilson from Enfield was sold a policy when he took out a mortgage with Loans.co.uk. But it proved useless when he had to give up work to care for his disabled wife and his case was turned down.
You may be able to claim compensation if a firm was not open about adding insurance to a loan, if you were told that you would not get a loan if you did not take out the cover, or if the sale was unsuitable because your circumstances mean it would not pay out.
You may also have a claim if your provider is making it hard to get out of your payment protection insurance deal. Rather than charging a separate amount each month for cover, some firms lump it in with the loan in a single premium. They then claim that it will be impossible to provide a refund if you pay off the loan early.
Experts warn that some firms will try their hardest to deny customers redress, but it is still worth fighting. Ian Allison at Conkers, a claims firm, said: "I have no doubt that some firms will try to wriggle out of paying claims. Firms tried to do exactly the same thing with endowment mis-selling and it was only when customers fought that they backed down."
If you think you have grounds for complaint, you must first write to the firm that sold the policy. If it does not offer redress, you should try the Financial Ombudsman Service, which can force firms to pay compensation.
Consumers who have been sold payment protection insurance by insurance brokers or advisers since January 2005 are fully covered by the ombudsman (financial-ombudsman.org.uk). You can also complain to the ombudsman about policies sold by banks or building societies before that date. But other consumers are unlikely to be able to fall back on the scheme. Without the threat of censure by the official body, advisers fear some firms may be quick to reject complaints. Last week's action against GE follows previous fines for poor selling practices for home-shopping firm Redcats and lenders Loans.co.uk and Regency.
GE provides store cards for dozens of retailers, and offers payment protection insurance policies to insure customers in the event that they are unable to pay card bills. In 2005 more than 850,000 policies including payment protection insurance were sold on its behalf, usually at the tills by shop assistants.
The FSA has asked GE Capital to write to people who were sold the insurance and pay compensation if it is deemed they were inappropriately sold payment protection insurance.
Margaret Cole, director of enforcement at the regulator, said: "We are determined to see significantly better practice in payment protection insurance sales and will crack down where firms fail to treat their customers fairly."
An Office of Fair Trading (OFT) decision to refer the market to the Competition Commission is also expected in the next two months. Its preliminary investigations uncovered problems such as firms automatically including payment protection insurance when they give potential customers a quote, ramping up the cost.
Many people buy payment protection insurance from the firm selling them their loan, but stand-alone products are often cheaper. The OFT uncovered a £156-a-year difference between the cost of the cheapest and most expensive insurance on a 20-year £100,000 mortgage. It estimates that consumers could save £1 billion a year by seeking out the most competitive quote.
But advisers question whether consumers need the insurance at all. Most policies do not pay out for the first 30 days and some exclude claims for the first three months. As many people find a new job in the first month, payment protection insurance proves to be totally useless.
