"We will now strengthen our action against firms who fail to treat customers fairly when selling PPI, " Briault warned.

The FSA has already fined five firms as much as £610, 000 for not following the rules when selling loan insurance.

Two-thirds of the firms visited and nearly all of the firms mystery shopped did not comply with rules on selling insurance, one-third of firms visited and fewer than half of firms mystery shopped also did not give customers the basic information needed to make an informed decision about whether to buy PPI.

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How PPI works
Single premium cover - one of the most common sorts of PPI - involves a one-off premium which is added to a loan at the outset.

The borrower then pays a regular monthly amount. Significantly, this includes a repayment of both the original capital plus interest, and the PPI premium on top – on which interest is also being added.

If the loan is repaid early, the borrower still has to pay off whatever is left owing on the single premium insurance, even though it’s no longer needed.

Often, a redemption penalty is also applied.

In effect, a borrower ends up paying several times over for the cover.

FSA PPI guide

How single premium insurance distorts the market
Meanwhile, have you ever wondered why it is that although interest rates charged by most credit card providers have barely changed in the past few years, the interest rate for personal loans appear to be getting lower and lower?

Sure, lots of credit cards offer teaser 0% introductory rates – but only for a limited period.

And most only apply it to transfers, the debt you carry over from another provider, not to ongoing purchases.

The APR on loans, meanwhile, has fallen consistently in the past five or six years from 10% or thereabouts to 5.5% in a number of cases and a more typical rate of about 7% from many providers.

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Why is this happening?
Well, forget all about one potential reason: falling base rates.

They haven’t been reduced since August 2005.

If that were the reason, we’d be seeing the same drop applying to both credit cards and loans.

Nor is it to do with some magically greater efficiency among loan providers.

No, the real reason is far sneakier.

Providers are happy to charge far less interest on a standard loan than for a credit card, making less money from the loan itself – because the bulk of their profits come from the sale of single premium insurance to hapless punters who don’t know any better.

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You pay - they gain
Citizens Advice offices around the UK have looked at the cost of cover.
Loan type

Loan amount

PPI premium

Premium as % of total loan
Unsecured personal loan

£8, 993

£2, 217

25%
Unsecured personal loan

£11, 000

£5, 133

47%
Hire purchase for car

£5, 059

£2, 157

43%
Hire purchase for car

£6, 895

£2, 317

34%
Unsecured loan

£5, 600

£744

13%
Secured loan

£25, 000

£12, 127

49%
Secured loan

£35, 000

£10, 150

29%
Conditional sale for car

£4, 300

£2, 394

56%
Unsecured personal loan

£13, 000

£3, 367

26%

Source: Citizens Advice

The cost of this cover is amazing. Agree to take out PPI insurance and your bank will add £1, 000 or more to a £5, 000 loan.

Incredibly, some then start adding interest to that sum as well.

And even if you pay off your debt early, you’re still liable to pay off the cost of the ASU cover over the full term of the loan, plus a hefty chunk of the interest.

No surprise, then, that the huge profits from ASU have had the effect of markedly skewing Best Buy tables on personal loans.

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The real sting
And when they need to claim, people are often turned down.

Research by Citizens’ Advice among its clients found that of those who claimed on their policies, a massive 85% were unsuccessful.

Many of the UK’s largest lenders not only sell these policies, but manufacture them, with profits on them estimated to be at least 35%.

Those who sell it rake in at least £5 billion a year, which therefore means anything up to £1.5 billion of that is clear profit.

Banks in particular make vast amounts of money from selling PPI, with estimates that around 70p in every £1 spent on this type of cover goes straight on to the bank's bottom line.

Analysts at investment bank Credit Suisse First Boston last year said they believed Barclays, along with several other banks including Lloyds TSB, were making at least £1 in every £10 of their UK profits from selling the insurance.

Profit margins reached 75%.

What's being done?
So what can be done about this scandal?

Until now, when you received a pre-filled loan application form, a single signature could commit you both to the loan itself and the cover that was being sold alongside it.

Since 2005, new rules on credit mean that borrowers have to add a second signature on their loan applications to say they want the cover.

Not much, but it’s something.

More significantly, the Citizens Advice used its powers to make a super complaint to the Office of Fair Trading into the way ASU/PPI cover is sold.

So-called super complaints can be made by a small group of consumer organisations, including Citizens Advice, to watchdogs such as the OFT.

The OFT is then bound to respond publicly within 90 days to say whether it believes this is an issue and what it intends to do about it.

Alternatively, it must give its reasons for not acting.

* Disclosure about PPI products to the consumer is generally low. For example, the price the customer is paying for the PPI policy is not always clear in the documents the firm gives them.
* Sometimes the firm only discloses the price at the very last minute, after the customer has agreed in principle to buy the policy. This is contrary to FSA rules that require price disclosure to be made clearly and in good time before conclusion.
* Many products contain a wide range of complex exclusions. For example, particular health problems are often excluded.
* The broad descriptions of these policies provided at the point of sale – cover for accident, sickness and unemployment - do not reflect the reality of the limited cover provided by many policies.
* The quality of training provided to staff and appointed representatives, and therefore their competence to sell PPI products, varied between firms.

If you’re applying for a loan, consider carefully if you’ll need this kind of cover.

If you do, don’t take out the insurance offered by a lender: websites like MSN Money will quickly offer you the same insurance, usually at a fraction of the price.

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Courtesy:
http://money.uk.msn.com/Insurance/articles/article.aspx?cp-documentid=6241361

 

UNDERSTANDING LOANS OFT stings rogue PPI traders By Katherine Fluke 2008 Customers are still being charged for things they don't want or understand when they take out loans, a government watchdog has found. The Financial Services Authority said yesterday many firms are still "failing to treat their customers fairly" when selling them loan payment protection insurance (PPI). "The right PPI can provide valuable protection for consumers, but they are entitled to expect that they will be treated fairly by firms when they buy it. They must be told how this product works, what it covers, and how much it costs, " said Clive Briault, FSA managing director of retail markets. "At the moment, too many firms are not meeting these requirements." And the FSA is promising to sting banks with hefty fines if they don't fall into line.

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