A Victory In The War Against Rip-offs!

There's been a significant victory in our battle against financial swindles, which could make every future borrower of a loan better off.

Since joining Fool.co.uk, I've waged a six-year war against one of the UK's biggest financial rip-offs: payment protection insurance (PPI). At last I have some good news to report!

What is PPI?

Payment protection insurance is optional insurance cover sold alongside credit agreements, such as credit cards, personal loans and mortgages. It meets your monthly repayments if you are unable to work due to an accident, sickness or unemployment. Also, barring mortgage PPI, it pays off your entire debt if you die.

Although this cover sounds quite attractive, especially in a recession, it's actually a con. This is because almost all PPI is sold by lenders, because they have exclusive access to borrowers. Sadly, the lenders take advantage of this captive audience by charging sky-high premiums for PPI. I know, because I worked in the PPI industry for more than a decade. In my time, I saw profit margins exceeding 80% -- and even 90% -- of the premiums collected.

The end of rip-off loan PPI

The good news is that, following an inquiry by the Competition Commission, the PPI industry was exposed as both profiteering and anti-competitive. Furthermore, City regulator the Financial Services Authority (FSA) began to crack down on poor selling practices, leading to multi-million-pound fines for PPI providers. To date, twenty firms have been fined for mis-selling PPI, with the largest penalty being the £7 million levied on Alliance & Leicester in October 2008.

Yesterday, another blow was struck for consumers when five leading banks announced that, from the end of this month, they would cease selling single-premium PPI with personal loans. These five banks are:

Alliance & Leicester
Barclays
Co-operative Bank
Lloyds Banking Group (which includes Bank of Scotland, Halifax and Lloyds TSB)
Royal Bank of Scotland/NatWest

With single-premium loan PPI, you pay one, massive, single premium at the start of the policy. It was one of my pet hates, because it was overpriced (adding 15% to 35% to monthly repayments), plus the premium was always added to the loan, so interest was charged on it.

Instead of selling single-premium PPI, these firms will offer monthly premium policies, which are more transparent and easier to cancel. Given that these five groups control the majority of the market for personal loans, this is a victory worth celebrating.

In addition, the FSA provided a veiled warning to other PPI sellers, by declaring: "The FSA expects other firms still selling single-premium PPI to take note of these developments" and "We are pleased these firms have stopped selling single-premium policies and would expect other firms to notice these developments and review their own positions." Clearly, the regulator is sounding the death knell for single-premium PPI, so it's good riddance to bad rubbish.

Buy PPI from an independent provider

I should point out that I'm not opposed to all payment protection insurance policies. In fact, at the right price, PPI can offer a valuable safety-net to people who are unable to work. As always, it pays to shop around, as the stand-alone PPI sold by independent providers comes at a fraction of the price. You can compare PPI policies at the FSA's own website, Moneymadeclear.

So that one victory in the war of rip-offs, but there are plenty more battles still to be won...

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