'Rip-off' insurance policies face ban

Two-week delay on sale of payment protection deals will end pressure on consumers

A major cause of the controversy surrounding payment protection insurance was removed yesterday when the Competition Commission said it wanted to ban sales of the policies when people take out loans and credit cards.

Banks should have to wait for 14 days before approaching borrowers to sell payment protection insurance (PPI), shielding them from instant pressure and allowing them to shop for better deals, the regulator said after a two-year investigation. It also called for a ban on financial providers increasing interest paid by charging for the entire cost of a policy at the start of a loan.

Consumer groups said the recommendations should end the worst of the abuses of PPI, a financial scandal that followed pension mis-selling and endowment mortgages. In January, the Financial Services Authority fined the HFC arm of HSBC £1m for failures to 163,000 customers and last month ordered Alliance & Leicester to pay £7m for its shoddy treatment of 210,000 customers. The credit-card giants GE Capital Bank and Capital One Bank have also been fined for PPI failings.

One personal finance campaigner, Martin Lewis, estimated that half of the policies in force may have been mis-sold, potentially resulting in a pot of £10bn reclaimable from lenders.

PPI is meant to protect customers who take out mortgages, loans or credit cards from defaulting on their payments should they fall ill or lose their job. But policies are riddled with exemptions which mean customers with a pre-existing medical condition or are self-employed cannot claim, and even those who do make a successful claim find policies pay out for as little as six months, regardless of the longevity of an illness or redundancy.

In a report about PPI in June, the Competition Commission said only 14 per cent of premiums was returned to policyholders, compared with 54 per cent for home insurance and 78 per cent for car insurance. It estimated people were being overcharged by £1.4bn a year

Yesterday, the Commission said forcing firms to wait a fortnight before contacting borrowers would allow people time to shop around, though they would be able to contact their banks "pro-actively" after 24 hours. "Single premium policies" – a lump sum added to a loan – would be banned. Providers may be ordered to give consumers a personal quote setting out the cost of the policy.

Peter Vicary-Smith, chief executive of Which?, hailed the findings as "a huge victory for consumers". But the Association of British Insurers claimed the Commission would "kill the PPI market" and leave millions unprotected. "Unemployment claims on PPI policies have grown 69 per cent in the past 12 months, showing just how valuable this cover is," said ABI director Nick Starling. The British Bankers' Association branded the proposals "irresponsible".