Mortgage cover customers get £60m

One million mortgage holders are to receive refunds and improved terms for redundancy and illness cover after the financial regulator ruled high street lenders did not have the right to change policies summarily.

During the past year banks, including all the major high street names, have been changing mortgage payment protection insurance policies to worsen their terms.

Critics complained that lenders were happy to accept payments from borrowers in good times but were changing the small print when claims were more likely in a recession, to put off policyholders and limit payouts.

Yesterday the Financial Services Authority announced that 18 lenders had agreed that under their current contracts they did not have the right to alter terms so suddenly.

As a result, all 18 will withdraw the changes and refund borrowers the increases in premiums made this year. The refunds will total £60m, or £60 per customer and should be paid by next June at the latest.

The Independent has been campaigning against mis-selling of payment protection insurance contracts sold alongside mortgages, loans and credit cards since January 1998.

PPI is meant to cover borrowers in the event of illness or redundancy but many people were never told they had taken out policies, were pressurised into doing so, or could never have made a claim because they were self-employed or had a pre-existing medical condition.

On 14 April, The Independent reported how the Post Office and other lenders were changing the terms of their MPPI policies.

Yesterday, the FSA said: "Our concerns centred on the terms permitting these changes and how clearly they were disclosed. The FSA expects its concerns to be addressed by the agreement reached."

Under the deal the 18 lenders, which were not named, agreed to proactively refund rises in premiums and reverse reductions in cover for policies changed in 2009; to reinstate policies cancelled by customers within two months of a change in 2009, and to freeze premiums and cover for existing customers for at least this year. They will amend contracts to ensure all customers are aware they may vary future premiums and cover.

Jon Pain, from the FSA, said: "This clarity will provide the basis for MPPI to remain a valuable option for many mortgage customers who wish to take out protection."

Which? personal finance campaigner, Lucy Widenka, said the FSA had taken action against firms "who have effectively been selling people umbrellas then trying to take them away at the first sign of rain".

She added: "MPPI is not a great product – just 28 per cent of premiums collected are paid out in claims – so we would urge consumers to shop around, or consider an alternative to MPPI to protect their finances as a whole."