The Citizens Advice Bureau (CAB) has called for an investigation by the Office of Fair Trading (OFT) into the long established practice of loan protection insurance. Investigations have shown lenders are not adhering to new consumer protection rules as they continue to mis-sell policies to many who take out personal loans.
Payment protection insurance (PPI) is aimed at borrowers who take out loans, credit cards and mortgages. It is supposed to provide security in case the borrower loses their job or is incapacitated due to illness.
The cover earns lenders £5 billion in revenue, and lenders are criticised for over pricing their policy and for selling protection productions to those who would not qualify under its terms and conditions.
The CAB calls the insurance a protection racket which has prompted them to make a super complaint to the OFT. The OFT have 90 days in which to respond.
There is plenty of evidence to support the claim as Suffolk County Trading Standards discovered when they sent undercover shoppers to high street banks and building societies to find out how policies were sold to them. Their findings have cause for concern. As of May 2005 rules were introduced that required customers to sign separately if they wanted insurance with the loan. However, trading standards officers found this was not happening. Insurance cover was being sold with personal loans even if it was not appropriate. Every lender who gave a quote included PPI. Many combined the cost of the loan and the cost of the cover in the quote, so customers cannot see what they are paying for. Normally customers have 14 – 30 days to cancel the PPI, but trading standards officers didn’t see much evidence of cancellation rights.
Another revelation was that lenders added the insurance premium up front. This practice makes for example a loan for £3,000 with a £500 PPI premium a loan for £3,500, interest being charged on the full amount.
Should customers want to cancel the insurance after it has started, they will have to take out a new loan for £3,500. A rebate will be give for of part of the premium but it will depend on the length of time the loan was in place before the cancellation. However this is not mentioned by many lenders.
There was no problem with bank staff and their knowledge of loan insurance. The problem was that it was not explained to the customer or they did not check to see it was appropriate or not.
Steve Greenfield, head of Suffolk Trading Standards, says the problem of mis-selling must be tackled, “This is the second PPI undercover expedition we have carried out in the past six months and both prove that the cover is being mis-sold.”