Payment protection insurance is failing many of those who need it most, adding to their debts instead of protecting them against hard times, a report from national charity Citizens Advice has revealed.
The report – published at the start of Advice Week 2005 – says the insurance sold to cover credit payments in the event of illness or job loss is often very expensive, mis-sold to people who cannot possibly claim on it, and designed to exclude many of the most common situations that can lead to debt problems.
Citizens Advice is making a super complaint to the Office of Fair Trading, calling on them to launch an investigation into the payment protection insurance business, which has an estimated 20 mn policies in force and produces annual revenue in excess of 5 bn.
Protection racket – based on evidence from 270 Citizens Advice Bureaux around the country – says that in many cases it is more about providing an additional source of profit for the financial industry than about protecting consumers.
Problems occur in nearly all sectors of the consumer credit market, from non-status mortgage lenders and hire purchase companies to major high street banks and credit card companies.
The premium paid can be equivalent to 25% of the value of a loan and has to be paid for by borrowing more.
It is common for interest to be charged on PPI premiums in credit agreements. Payment protection insurance on some credit cards can increase the cost of borrowing by around 9% a year.
Borrowers are often sold completely inappropriate policies when they take out credit agreements.
In many cases high pressure sales or inertia selling are used to force people to take out insurance that they cannot afford, do not want or need, and cannot benefit from.
Policies sold by several well-known mainstream lenders exclude cover for common problems like bad backs and mental health problems that can stop people working.
Many also have arbitrary age limits and ban the self-employed and those on fixed-term contracts from making a claim.
Even where people are able to make a successful claim, the amounts paid out do not guarantee to keep them free from debt, particularly credit card debt.
Some insurance only pays out for a year, and then only covers minimum payments.
For example, a borrower getting payments from a PPI policy to cover a 1,000 credit card debt could see their debt reduce by just 12 over one year.
Delays in the payment of claims can trigger spiralling debt and administration charges, leading to borrowers being pursued by debt collectors and the threat of court action.
Citizens Advice says that PPI is a particular problem for the most vulnerable borrowers, who are also the people most at risk of running into financial difficulties.
Earlier research found that 85% of CAB clients who had claimed on payment protection insurance had been unsuccessful – in sharp contrast with industry assertions that only 15% of claims are turned down.
Bad practice in the sale of payment protection insurance is also often linked to irresponsible lending. CAB advisers report cases where consolidation loans advanced to borrowers already in financial difficulty are rolled over several times, with a new PPI policy sold each time, increasing the debt significantly.
David Harker, chief executive of Citizens Advice, says: “Payment protection insurance is sold to borrowers with the promise of peace of mind and reassurance that credit repayments will be covered if they fall on hard times.
“People are lulled into a false sense of security, only to find that far from providing protection
against an unexpected drop in income, PPI often just adds to their debt problems.
“At best the excessive cost for minimal benefits makes it bad value for many people; at worst mis-selling means the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt.
“This is particularly worrying at a time when personal debt levels are escalating.
“These problems are not new – we first reported on them ten years ago. It is a scandal that in this time so little has been done to remedy them.
“Selling PPI is big business, and this insurance does not come cheap, so it is high time the industry developed good minimum standards of cover.
“We badly need an official investigation of how this market is operating, leading to effective regulation that ensures a fair deal for all consumers, and which also protects the most vulnerable.”
Citizens Advice is calling on the OFT to launch a market
investigation into the sale of payment protection insurance with credit products.
It also wants the Treasury Select Committee to hold an inquiry into payment protection insurance, particularly the costs and incentives involved.
It is urging the Financial Services Authority to develop a basic PPI policy setting out the minimum acceptable standards with which all lenders should comply. It says there should be a cap on the cost of premiums and no blanket exclusions.