The financial watchdog is laying into lenders for unfairly rejecting complaints about payment protection. Almost £200 million could be handed back...
The Financial Services Authority (FSA) has ordered a number of leading lenders to improve their handling of complaints into payment protection insurance (PPI). The City watchdog has been forced to act because of the number of complaints which have been rejected by lenders, only for the Financial Ombudsman Service (FOS) to rule in favour of policyholders.
The worst insurance of all
Payment protection insurance provides cover against accident, sickness and unemployment, and is sold alongside credit agreements such as credit cards, personal loans, mortgages and so on. Although PPI can provide valuable cover, the market has been tarnished by anti-competitive behaviour, profiteering and widespread mis-selling by lenders.
Having worked in the PPI market throughout the Nineties, I've first-hand experience of this dreadful insurance. Indeed, at the height of the credit boom, I reckon that lenders and insurers pocketed a profit of £4 billion a year by hard-selling PPI to a captive audience. Today, there may be 20 million PPI policies in force -- most of which provide inferior cover at sky-high prices.
From velvet glove to iron fist
As you've probably guessed, PPI is one of my pet hates. Since I became a financial writer in 2003, I've criticised it more than 600 times in print. Alas, until 2005, general insurance policies such as PPI were voluntarily supervised by a worthless, self-regulated industry body known as the General Insurance Standards Council (GISC).
Fortunately, on 14 January 2005, the Financial Services Authority took over supervision of general insurance, sending GISC to its grave. In theory, this should have led to instant improvements in the promotion and selling of PPI and other policies, but the FSA initially was slow to act.
After a couple of years, the FSA finally reacted to repeated warnings about widespread problems within the PPI industry and began fining the worst offenders. To date, the FSA has fined 22 firms which mis-sold PPI a total of £11.8 million. Of course, this is just a drop in the ocean when compared to the billions firms banked from dishonestly selling PPI, but it's better than nothing.
The FSA's latest crackdown
By 29 May of this year, the FSA had forced providers to stop selling of the worst kind of PPI -- single-premium policies linked to personal loans -- at the point of sale. At a stroke, this cleaned up the worst area of the market, leaving the FSA free to tackle the PPI sold alongside mortgages, secured loans and credit cards.
Nevertheless, in the first half of this year, the Financial Ombudsman Service received more complaints about PPI than any other financial product -- 750 a week, on average. In its latest report, the FOS revealed that it rules in favour of policyholders in four out of five PPI complaints (80%) referred to it.
This staggeringly high reversal rate suggests that problems with PPI are not being properly addressed by lenders' customer-service teams. In addition, the FSA revealed that, on average, PPI sellers reject around three in five PPI complaints (60%), but some firms reject 98% or 99% of complaints. After rejection, one in six complaints (16%) reaches the FOS, over 80% of which are overturned in the consumer's favour.
Yesterday, the FSA ordered the ten or so firms responsible for two-fifths (40%) of loan PPI sales to review previous sales since 1 July 2007 for evidence of mis-selling. Its targets include big banks such as Barclays, Lloyds TSB and RBS.
If big problems are found at these firms, then the mis-selling review will be extended right back to January 2005, when the FSA took general insurance under its wings. The watchdog has also ordered a review of all PPI complaints rejected since 14 January 2005, which is great news for peeved policyholders.
All PPI policyholders found to have been treated unfairly must be compensated by the seller. The FSA reckons that 185,000 previously rejected PPI complaints will be re-opened, leading to compensation of up to £195 million being awarded to policyholders. In addition, the FSA will introduce new guidance by the end of the year in order to ensure that future PPI complaints are handled properly and fairly.
Top marks to the FSA
Given the vast profits made from the sale of PPI (typically, 80%+ of the premium), it's no wonder that lenders are dragging their feet. Thus, despite investigations and enforcement action by the Office of Fair Trading, Competition Commission and the Financial Services Authority, lenders still don't treat PPI customers fairly and consistently. Perhaps a few £100-million fines would put their houses in order?
This latest step by the FSA will help to clear up PPI problems from 2005 onwards, which is a huge leap forward. So, it's full marks to the FSA for doing its job by backing consumers over banks. At last, after seven years of waging a personal war against PPI, I'm starting to believe that this battle can be won!
In the meantime, if you've bought a loan PPI policy since 1 July 2007, look out for a letter from your lender with instructions on how to make a mis-selling claim. For some customers, the potential compensation could add up to thousands of pounds...
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