Good riddance to this £60m rip-off

If you got taken in by this rip-off, you can now get your share of £60 million in compensation. Cliff D'Arcy reports.

A week ago, I praised City watchdog the Financial Services Authority (FSA) for cracking down on the mis-selling of payment protection insurance. Today, it's another thumbs-up for the FSA as it recovers another £60 million for badly treated homeowners.

PPI: a protection racket

Most payment protection insurance (PPI) is sold by lenders to customers taking out credit cards, personal loans, mortgages and other credit agreements. It meets your monthly credit payments -- usually for up to a year -- if you are unable to work due to an accident, sickness or unemployment.

Although PPI seems good in theory, widespread mis-selling and massive profit margins (often in excess of 80%) have turned what should be valuable cover into Britain's biggest rip-off. Indeed, at the peak of the credit boom, lenders and insurers were making profits of £4 billion a year from flogging PPI.

A £60 million payout for homeowners

Until recently, the FSA has been focusing its enforcement action on the worst part of the PPI market, known as 'single-premium loan insurance'. With these policies, the PPI premium is added to your loan as a lump sum, which pumps up your interest bill. Given that the profit on a loan PPI policy could reach £1,000 a time, these were mis-sold in the millions.

Having made solid progress towards cleaning up loan PPI, the FSA has now turned its guns on mortgage payment protection insurance (MPPI). Mortgage lenders and insurers were desperate not to come under the FSA's watchful gaze, arguing that MPPI was the 'cleanest' part of the PPI market. Nevertheless, the regulator has struck another blow for consumers by ordering the return of £60 million wrongly collected from mortgage borrowers.

Over the past 12 months, 743,000 people have joined the ranks of the unemployed. Hence, MPPI insurers became worried about rising claims, so they responded by raising their premiums, cutting the benefits on offer and reducing their payouts.

In other words, having sold umbrellas in the sunshine, insurers demanded them back when it started to pour. While some increased premiums by a fifth (20%), others reacted by doubling their rates. In other words, some customers paying, say, £30 a month for their MPPI were asked to pay £60 or go elsewhere.

The problem is that, under the FSA's general principles, insurance policies and practices should be 'clear, fair and not misleading'. The FSA took the view that radically altering policy terms and conditions and increasing premiums during the bad times did not meet these principles.

Therefore, the FSA told insurers to reverse these changes, resulting in a million homeowners being owed an average refund of £60 each -- a total of £60 million.

What does this mean for you?

If your monthly MPPI premiums have increased over the past year, then your mortgage lender or insurer should contact you with details of your refund. Also, if your cover has been downgraded (for example, your 'excess period' has been lengthened from, say, 30 days to 90 days), then these changes must be reversed. If this has affected an ongoing or past claim, then demand the extra payout due.

Likewise, if you cancelled your policy with two months of a premium increase or cover downgrade, then your MPPI provider must offer to reinstate your previous cover without penalty. In addition, MPPI providers have agreed not to increase premiums or cut cover before next January. All refunds must be paid to policyholders by next June.

Better than the Nineties crash

While MPPI providers may be enraged with this ruling, they have only themselves to blame. For at least 12 golden years, they greedily gorged on billions of pounds of excess profits from the sale of MPPI. Now a downturn has arrived, they have been caught short, because they failed to hold back sufficient reserves to cope with a recession. Just like the big banks, PPI providers forgot the basic rules of risk management and are now paying the price for their recklessness.

During the Nineties, I worked for several of the UK's biggest PPI providers. Hence, I witnessed what happened to these firms during the 1989-94 housing crash. At this time, general insurance policies such as MPPI were governed by a voluntary industry code of practice which offered precious little consumer protection.

As unemployment soared to over three million, MPPI insurers acted to preserve their pumped-up profit margins. Some forced huge premium hikes on policyholders (some premiums tripled); others radically slashed the benefits on offer; while the worst-hit took the decision to close entire MPPI schemes and walk away, leaving policyholders stranded without cover.

I witnessed these decisions first-hand in the Nineties, so I know they were made purely in the interests of shareholders. Thus, I'm delighted that the FSA has taken a stand by not allowing MPPI providers to once again make hay while the sun shines and then run away when it starts raining. At last, our financial watchdog is really starting to show its teeth by protecting consumers!

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