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The UK Banking industry has certainly had a severe weathering by the financial storm which has been raging since the collapse of Lehman Brothers in the US and in the UK the melt-down of Northern Rock in August 2007. In addition to this, there have been serious changes that have affected one of the banks most significant areas of income, payment protection insurance. The banking sector has historically made around an estimated £1.6bn per annum (2006) from the sale of such policies.

What is PPI?

PPI which stands for Payment Protection Insurance is a type of insurance which typically will cover repayments on different forms of finance for a given period of time in the event that you are unable to meet payments due to sickness, accident, redundancy or sometimes death. PPI can be provided against the following types of agreements, motor finance, personal loans, credit cards, store cards, amongst others.

PPI has become an extremely controversial due to the alleged miss-selling of the policies which has occurred. According to Which? the independent advice service up to 50% of policies may have been miss-sold. In some of these cases the lender/insurer had failed to provide details on the various benefits of the policies, so the consumer may have often taken out the cover without really understanding what it was for!

Other examples of how the policies have been miss-sold include, self employed people that could not claim for redundancy, also where pre-existing medical conditions were not identified which in turn invalidated the insurance. In some identified cases the cover was added to the loan without any knowledge or consent from the consumer.

The Cost of PPI

The cost of credit insurance can vary. Typically the factors that influence the price are as follows, the type of finance you are taking, the term of the loan, the amount you are borrowing, and the company that has sold you the policy. As a rule Payment Protection Insurance can be considered to be an expensive form of cover and can make a significant difference to your monthly repayments on your loan as well as the amount that you pay in total.

How many PPI claims are successful?

According to recent statistics from the Office of Fair Trading only around one in every five claims on PPI policies is actually successful.

As recently reported by the BBC, the FSA has been unhappy with the speed with which Financial Services Companies have responded to the alleged miss-selling of PPI. In 2008 the Financial Ombudsman Service received 25,000 PPI complaints, making the insurance the biggest source of financially related public grievance. Examples of the organisations who have been fined for the miss-selling of policies include Credit Card Company Egg who were fined £721,000 and Alliance and Leicester bank was fined £7m.

I was told by a lender that the PPI was a requirement to get the finance needed I needed. Is this true?

Firstly there is absolutely no obligation to take out this insurance with any particular company, including the company through which you are taking out finance.

If you are looking at taking out PPI Insurance it is certainly recommended that you shop around to see if you can get a cheaper quotation, as often the stand-alone products are considerably cheaper than the “packaged” deal provided by the lender. Secondly, this is not a compulsory form of cover, and there is nothing in any of the loan agreements to state that you must have PPI in order to get finance, so this is a clear demonstration of where a policy has been miss-sold. You should in no circumstances let the lender tell you otherwise.

It is also worth noting that financial institutions are no longer allowed to offer the policies at the same time as selling the loans which they are often associated with, and there has to be a “breathing” time in-between the sale of each product.

I am interested in taking out PPI but don’t want to get ripped off. What do I do?

The best way to ensure that you get the right policy at the right price is to shop around. Compare different policies and prices, which can be easily done online through the various price comparison sites which are available.

Ensure that you read the small print extremely carefully, as there are multiple exclusions with these types of policies, and this will enable you to see that you are cover will be right for you.

My PPI policy may have been miss-sold to me. Can I make a claim for compensation?

This really depends on a number of factors, such as the circumstances under which you purchased the cover, the reasoning for why you feel that it could have been miss-sold, also when the policy was taken out. PPI came under the FSA umbrella in 2005, therefore any policies purchased before this time will not be covered by the current FSA regulations and guidelines.

The claims process has become easier as the volume of claims has increased. Therefore most claims management organisations will quickly be able to identify a valid claim.

However even if you are not successful in claiming, it is certainly still considered to be a good idea to speak to the provider and complain, as the FSA has been coming down increasingly hard on lenders that have potentially miss-sold this cover.