The End Is Nigh For PPI

Ever since I joined Fool.co.uk in 2003, I've waged a long war against rip-off payment protection insurance (PPI). In theory, PPI covers your monthly repayments on a mortgage, loan or other credit agreement if you are unable to work because of an accident, sickness or unemployment. In practice, this insurance is massively overpriced, widely mis-sold and extremely difficult to claim against.

Despite these fundamental flaws, millions of borrowers buy PPI policies every year. This is largely because banks and other lenders give PPI the hard sell. Indeed, this insurance is often sold to people who have no prospect of making a successful claim.

Ever since the Financial Services Authority (FSA) took over the regulation of general insurance in January 2005, it is been looking into the poor practices of the PPI industry. In the past two years alone, the FSA has fined eleven financial firms for failing to sell PPI in a right and proper manner.

The Ombudsman isn't happy

Today, the Financial Ombudsman Service (FOS) called on the FSA to take further steps to stop the ongoing mis-selling of payment protection insurance. The FOS warns that complaints about PPI have jumped tenfold since 2006. Today, they account for around a quarter (25%) of all formal complaints to the Ombudsman. In the majority of cases (currently running at over five hundred complaints per week), the FOS upholds policyholders' complaints.

Clearly, this suggests that there is a serious problem at the heart of the PPI market. Indeed, the FOS is gravely concerned that banks and other lenders are ignoring criticisms of their selling practices and fobbing off genuine complainants. Similar complaints keep cropping up again and again, showing that firms are failing to learn lessons from previous FOS decisions. Thus, when the FSA's board meets later this month, it will discuss the FOS's concerns and decide on what action to take.

Beating the `protection racket'

Given that PPI providers make around £5 billion a year from selling this cover, it comes as no surprise that they are desperate to preserve this `protection racket'. Nevertheless, PPI has come under repeated attack from various crusading organisations, including the FSA, FOS, Citizens Advice, the Office of Fair Trading, the Competition Commission and, of course, The Motley Fool.

Another long-time champion is Which? magazine, which this week spoke out against PPI once again. It warns that 1.3 million credit-card customers had mistakenly bought PPI, assuming that it was obligatory or would improve their chances of getting credit. Which? reckons that card issuers are banking £970 million from around ten million PPI policyholders. This comes to an average of £97 per account, when the true cost of providing this cover is a fraction of this sum.

Hence, Which? urges these customers to find better protection and then ditch this `modern-day snake oil'. Having worked in the PPI industry from 1991 until 2002, I know only too well how extortionately over-priced this insurance is. Indeed, I've never found a legal rip-off as lucrative as PPI -- and, thanks to tightening regulation, I hope that I never do.

In the meantime, we must await the outcome of the Competition Commission's ongoing investigation into PPI. As I revealed in The Death Of Rip-off Insurance?, the Commission has ruled that, thanks to the banks' stranglehold over PPI, this market is anti-competitive and customers are being overcharged by at least £1.4 billion a year. With any luck, we can look forward to a crackdown on PPI when the Commission releases its recommendations and remedies at the end of the year.

Finally, not all PPI policies are equally awful. For instance, the stand-alone PPI sold by independent providers such as award-winning Fool PartnerBritish Insurance offers far greater value for money. As a matter of fact, swapping an existing PPI policy for one of these Best Buys could leave you hundreds of pounds a year better off...

PS: Many thanks to the Fool contributor who dubbed me Cliff "The PPI Avenger" D'Arcy. It's cool to have a superhero name!