Loan protection policies 'are £1.4bn con'

Banks are overcharging customers by £1.4bn a year for loan protection policies that many will be unable to claim on, the Competition Commission has ruled.

In a damning report into personal protection insurance (PPI) policies the commission found that banks were ripping off borrowers who wish to protect themselves from losing their job or falling ill.

It said it might be necessary to ban financial providers from selling the policies with the loans, credit cards and mortgages they are meant to cover. It added that the cost of the loans could also be capped as part of reforms to the £4.4bn-a-year industry.

Presenting the preliminary report of its 16-month inquiry into PPI, the commission said the biggest problem was that there was little competition because the majority of the cover was sold as an "add-on". Many customers were unaware they could obtain a better deal elsewhere.

Complaints to the Financial Ombudsman about the mis-selling of PPI have soared this year after The Independent highlighted the issue in January. Taking out PPI can add £3,000 to a £7,500 loan. But many policy-holders have found that they cannot make a claim because they have a medical condition or are self-employed. Those who do claim find payments usually last 12 months or less.

So far 12 institutions have been fined by the Financial Services Authority (FSA) for mis-selling PPI. HFC, a sub-prime subsidiary of HSBC, was hit with a £1m fine in January.

The Competition Commission said that, in general, only 14 per cent of PPI premiums paid back to policy-holders in claims compared with 54 per cent for home insurance.

The inquiry's chairman Peter Davis, who is deputy chairman of the commission, said: "We've found serious problems with the PPI market and consumers are paying for the lack of competition.

"Distributors don't appear to compete much with each other on either price or quality of PPI – neither do they appear to do much direct advertising to win customers from each other."

The watchdog called for consumers to be told the cost of the product clearly and advised they could shop around to get a better deal. It also proposed a ban on the sale of single premium policies, where the entire cost of the policy is loaded on to the debt at the start.

Nick Starling, the Association of British Insurers' director of general insurance, acknowledged there had been problems with PPI but added that changes had been made and should be allowed to settle down.

"We are very concerned that the Competition Commission's proposed remedies could destroy this market, particularly while we are facing a period of economic uncertainty," he said.

A hard line – and about time

*It's good news that the Competition Commission has taken its inquiry into the PPI market so seriously, especially given that previous investigations into consumer markets have ended up being such damp squibs. But while there's no doubt the market is in need of a clean-up, the suggestions are perhaps a little heavy-handed. Imposing price caps, banning single premium policies – or even outlawing the sale of PPI altogether – are all steps too far. Although PPI is unsuitable for a great many customers – who would do much better taking out a broader income protection policy – there are a small number of people for whom PPI will be the right solution, if the prices are reasonable and there are independent underwriters. Not only will these customers lose out if the industry is snuffed out altogether, but the rest of us might feel the aftershocks too given that the banks earn a decent slug of their profits from PPI sales. The only steps that are really needed to clean up the PPI market are relatively simple. Force banks and loan providers to clearly show the costs, spell out any exclusions and give customers comparisons with independent providers.

James Daley, Personal Finance Editor

How much you pay in to insurance policies – and how much they pay out

Motor: £8bn premiums, 78% paid back in claims

Liability: £2bn, 66%

Health: £2.8bn, 65%

Home: £4.6bn, 54%

PPI: £4.4bn, 14%