Payment Protection Insurance (PPI) guide
Ever wonder why the Financial Conduct Authority (FCA) are making so much fuss over Payment Protection Insurance (PPI), and why they want to stop people claiming for PPI compensation from August 29th, 2019?
You've come to the right place. This is our full guide to how PPI works, how its infamous mis-selling crisis unfolded and what the banks will do next.
What is Payment Protection Insurance (PPI)?
PPI is designed to protect borrowers' payments.
If the borrower loses their job, has to take maternity leave or otherwise suffers a loss of income so severe that they can't continue to make repayments on their financial commitment, the insurance promises to cover the payments until the policyholder gets back on their feet.
Do I need PPI?
The fact that PPI was mis-sold for so many years doesn't mean that, when it's sold well and appropriately, it can't offer consumers some useful protection.
However, PPI has become so infamous precisely because, over many years, it was sold neither well nor appropriately.
For example, many of those who ended up with PPI policies could never have claimed. Many policies stipulated that those who were self-employed couldn't claim, for example, yet millions paid out for the insurance in any case.
All in all, then, PPI can still be worthwhile but only when borrowers check the following:
- Policy small print: all insurance policies have eligibility requirements and exclusions that are well worth knowing about before signing up.
- Overlapping cover: in many cases, those with PPI would have been able to cover repayments for 12 months with workplace benefits, savings or another insurance policy they already held. Their PPI policies were superfluous
- Other providers: PPI was often sold alongside another product like a loan so people were unlikely to look at different providers to find the best deal before signing up. Looking at competitors is a good way to assess value for money.
PPI mis-selling: a short history
PPI grew into the biggest personal finance story of the last five years through a groundswell of consumer complaints that slowly turned into a torrent that has cost the UK's biggest banks millions of pounds.
Consumer groups started to raise concerns about the product as early as 1998, in much the same way that we talk about products that offer payment in case of ID theft now.
However, solid action wasn't taken until 2005 when the Financial Service Authority (becoming the FCA in 2013) took over regulation of the general insurance market and issued their first report on mis-selling which concluded that, "the sale of PPI poses a high risk to our consumer protection objective."
In the same year, Citizens Advice issued a supercomplaint about PPI to the Office of Fair Trading (OFT).
That complaint included evidence of:
- Excessively high prices.
- Only partial protection, with many exclusions which prevent many seemingly reasonable claims.
- Mis-selling, including high pressures sales tactics.
- A slow and often unfair claims process when consumers were eligible to claim.
Opposition to PPI was beginning to grow. In September 2006 through to January 2008, fines for PPI mis-selling were levied against some smaller financial providers by the FSA.
In January 2009, a year after the OFT handed its investigation over to them, the Competition Commission recommended that sales of PPI be banned alongside lending products such as credit cards and loans.
Barclays, with the support of Lloyds group, took the Competition Commission ruling to court.
In May 2010, the Competition Commission won out against Barclays' appeal and could stop the sale of PPI at point of sale.
In August 2010, the FSA published its PPI consultation paper which recommended that banks who had engaged in mis-selling should compensate all the customers who had been sold products using the same methods.
The British Banking Association (BBA), a trade body for all UK banks, appealed against the FSA rules by seeking a judicial review to have them annulled or curtailed.
Meanwhile, consumer groups were continuing to encourage millions of people to claim for PPI premiums, which often added up to thousands of pounds over the course of the borrowing period.
By May 2010, 30% of all cases coming in to the Financial Ombudsman Service - the body which adjudicates when a consumer doesn't accept how a bank internally handles his or her complaint - concerned PPI. The largest complaints group by far for any single product.Breakthrough
However, the BBA's decision to take the FSA decision to a judicial review stopped the reclaiming process in its tracks: every High Street bank except for Santander stopped processing PPI claims.
The real breakthrough for consumers came in April 2011, then, when the banks lost their PPI case and the freeze on claims ended. A month later, the BBA confirmed that they wouldn't take the decision to appeal.
However, the story is far from over. In October 2011, banks admitted they were falling behind on refunds. In fact, even into the second half of 2017 - when the FCA launched their publicity campaign to get more people to claim ahead of the August 2019 deadline - many claims still aren't settled, with the FCA suggesting that a "majority" of affected customers could still be to claim the compensation they're owed.
Given that 12 million people have already been paid compensation so far, and given that some 64 million PPI policies were sold between 1990 and 2010, this could mean that a very large number of people are still due to come forward to claim.
Unfortunately, however, even having taken the hit of billions in repayments banks have started to capitalise on similar products and often in disturbingly similar ways.
After a long and thorough investigation starting in late 2011, for example, a firm selling ID theft was fined millions by the FSA and, just as with PPI, ordered to pay compensation to mis-sold customers (See 'the new PPI' below for more information on this and other products).
Added to this, the National Audit Office published a report in 2016 which concluded that the FCA "cannot know whether its activities are reducing the overall scale of financial services mis-selling to consumers".
This was because the number of mis-selling complaints about banks had increased substantially since 2010, and the FCA had no way of determining whether the growing number of complaints related to old or newer cases.
A short history of... fines for PPI mis-selling
|Sep 2006||Regency mortgage corp ltd||£56,000|
|Jan 2007||GE capital bank||£610,000|
|Feb 2007||Capital One||£175,000|
|Jan 2008||HFG Bank||£1,085,000|
|Jan - Sep 2011||16 firms, 92% market||£776 million
(£102m in May/June 2011)
(£19.6bn in Feb 2014)
|Jan 2013||The Co-op bank||£113,300
(for delaying complaints)
|April 2015||Clydesdale Bank||£20.67 million
(for mishandling complaints)
|Jun 2015||Lloyds Bank||£117 million
(for mishandling complaints)
|Jun 2016||CT Capital||£2.4 million
(for failing to implement complaints handling procedures)
Note that these fines don't begin to cover the true cost of this scandal for the banks.
As we update this article, in late 2017, Lloyds Banking Group estimates that they've lost over £18 billion through PPI claims and the associated costs, while Barclays have been hit with costs exceeding £9 billion.
Overall, the UK banking industry has set aside a total of £43.5 billion to cover PPI compensation costs, with around 82.5% being of this total being earmarked by the Big Four (Lloyds, Barclays, RBS, and HSBC).
That said, as PPI has grown more complex such figures have been increasingly hard to calculate. For example, the figures calculated by the banks has been rising regularly, with Barclays and Lloyds each adding an additional £700 million to their total bills in the second quarter of 2017 alone.
Even with the constantly shifting estimations, the amounts set aside so far suggest that this has been, by far, the biggest consumer scandal of recent years.
Under the cloud of the mis-selling scandal, it seems unlikely that PPI will ever be sold as widely as it once was.
As we've noted above, the product is still available through a number of providers, yet new rules for its sale mean that it's unlikely to be mis-sold again.
However, PPI remains a big part of the financial landscape even in 2017.
Claims for mis-sold policies are still rolling in: complaints about PPI are still by far the most common type the Financial Ombudsman Service (FOS) deals with.
Not only that, but they're likely to increase in light of the August 2019 deadline, which will encourage people who suspect they might be owed compensation to come forward.
On top of this, a judgement made by the Supreme Court in 2014 - known as the Plevin Judgement - now entitles those who had their initial claim rejected to apply again, so long as they were sold a PPI policy by someone who didn't disclose the high commissions they were receiving.
And as long as claims continue so will the parasitic claims management industry, which has made upwards of £5 billion out of PPI claims.
Claims management firms
As soon as the scale of the PPI scandal emerged so did a number of commercial businesses which aimed to profit from it, despite the fact that claiming through the banks and even taking the complaint to the FOS is free and requires no legal knowledge.
The average PPI payout for a mis-sold policy is £2,750 so, assuming that the claims management firm takes its usual 25% fee, consumers who use a claims management firm must pay out £825 of their rebate as soon as they get it.
35% of people applying to FOS between the ages of 25 and 54 do so through private claims management firms and those in the socioeconomic group DE (unskilled workers) are twice as likely to do so, compared to those in the ABC groups.
The youngest (under 25) and oldest groups (over 65) were far more likely to bring a claim themselves.
Moneysavingexpert and Which? have been instrumental in preaching that consumers don't need to use claims management firms in order to get their PPI refunds.
However, as awareness about claims firms has increased and claims have started to trail off customers have become harder to come by and that's caused the claims industry to take a nasty turn.
In December 2012, for example, the Advertising Standards Authority (ASA) censured a firm which had sent out spam texts about PPI claims, a problem that regulators are scrambling to fix.
The 'new PPI'
Finally, as we noted above, even in the wake of the PPI crisis, some PPI-like products remain.
These deals are like PPI in that they also often sold alongside borrowing and also potentially difficult to claim on or otherwise unsuitable for the consumers who purchase them.
In November 2011, the FSA issued a warning to firms about such products and said that it would take cases of mis-selling very seriously.
However, many consumer groups and other interested parties continue to contend that financial providers are following the letter, rather than the spirit, of such guidelines.
Let's look at a couple of examples.
Repayment Option Plans (ROP)
It was revealed back in 2011 that Vanquis makes a large proportion of its profits through selling Repayment Option Plans (ROP), a good example of the then new PPI-style product.
Like PPI, ROP policies required a single monthly repayment, often as a proportion of the amount borrowed, and claimed to offer borrowers protection if they suffer financial difficulty through a change in circumstances.
Unlike PPI, however, the cover took the form of either a repayment freeze until the end of the difficulties or a payment holiday so that cardholders could skip some repayments without penalty.
CPP's ID theft insurance
Also walking in PPI's footsteps were a firm called CPP. Mis-selling of their ID theft insurance, in partnership with some of the UK's biggest banks, got the company fined and ordered to pay compensation to customers.
The products were sold poorly, the FSA said. Salespeople frequently either overstated the risk of ID theft or outright lied about what the products would cover.
Under a redress deal, the company had to pay compensation to customers they dealt with directly - see more on the initial deal here. In addition, banks that sold CPP products alongside their own - for example, by putting customers through to a CPP salesperson when they call customer services - also had to compensate consumers that were mis-sold.
As we reported at the time, seven million former CPP customers were able to claim compensation from February to the end of August 2014. Later, the FCA reported that, by March 2015, the scheme administrators had "paid £451m of compensation to 2.37 million claimants, an average of £190 per claim".
The scheme showed that regulators have learnt from PPI: all CPP customers were entitled to claim and the whole process was designed to end by a set date, much more organised than what was initially seen with PPI.
Yet the moral of all of this remains the same: despite all the years that have elapsed since the PPI scandal first broke, consumers still shouldn't let their guard down.