The Office of Fair Trading has told insurers and lenders that after 1 April borrowers should no longer have to positively opt out (typically, by remembering to tick a small box) to avoid taking unwanted insurance.
However the new rules do not affect existing arrangements. Consumer organisations say that many borrowers are continuing to pay substantial premiums on poor value credit insurance policies.
Some people (for example, the elderly and those on short-term contracts) are paying for insurance which may specifically exclude them from making claims. Others remain unaware that their loan repayments include an insurance component.
Originally the Government was planning to prohibit inertia selling of credit insurance by law. Last summer however Sir Bryan Carsberg, Director General of Fair Trading, told the Government that its plans for statutory controls were not needed, arguing instead that he already had sufficient powers to police this aspect of the industry.
In effect, the OFT warned credit providers that anyone continuing negative selling of insurance might be putting their credit licence at risk, with a deadline initially set for the end of last year.
Sir Bryan promised that his staff would carry out a compliance survey in January this year. The OFT has given the industry an extra few months' grace and the January survey has not yet taken place.
Consumers may need to check that the industry is following the OFT's ruling. 'What I would say is that if anyone does find they're being offered insurance using the negative option method after 1 April they let us know,' an OFT spokeswoman said.
Elizabeth Stanton, director of the Retail Credit Group, says that her member firms (mainly large high street retailers) have already stopped negative selling of insurance, although she admits that in many cases this was done reluctantly. 'Some of them fought very hard for a long time and have now seen the take-up rate for insurance drop quite dramatically. If the take- up is smaller and more self-selecting, and therefore more liable to claims, inevitably the schemes will become more restrictive or more expensive,' she says.
The Burton group (including Debenhams and stores such as Top Shop and Dorothy Perkins) changed from 'opt out' to 'opt in' selling of insurance on in-store credit last October and November, while the House of Fraser group switched between July and September. GE Capital, which runs these and other retailers' credit arrangements, says that the move away from negative insurance selling for high street names such as Russell and Bromley, Laura Ashley and Kwik-Fit was completed by last December.
By contrast, Marks and Spencer stopped negative selling as early as 1986. The John Lewis Partnership doesn't offer insurance at all. 'Our view is that it offers poor value for money, and that it is only offered because creditors can make a great deal of money for themselves for very little,' a John Lewis spokesman said.
Credit providers have an obvious interest if consumers can be persuaded to pay for insurance to cover circumstances (such as unemployment or illness) where they might otherwise default on loans. Consumers clearly can benefit too. 'Millions of pounds have been paid out in claims. For people who need it, it's a godsend,' Elizabeth Stanton said.
However for some people who have needed it, credit protection insurance has turned out to be worthless. A 1992 survey undertaken by Citizens Advice Bureaux in the North of England found a long list of cases where borrowers were turned down when they tried to make claims. Single parents, the self-employed, trainees and those on fixed-term contracts were particularly affected by policy conditions on redundancy and unemployment.
'Problems with credit protection insurance dominate the evidence as usual,' the National Association of Citizens Advice Bureaux said last month in its report on finance cases referred to it by bureaux. It reported the case of a Lincolnshire man in his seventies sold a policy that specifically excluded claims from anyone over 65 and also highlighted several disputes where insurers were alleging that medical conditions were pre-existing when policies were taken out.
The Insurance Ombudsman Julian Farrand has also drawn attention to the issue. 'It's still a matter of some concern,' he says. 'People may have got credit insurance - either through negative or inertia selling, or because they ticked a box to get it - but nobody explained to them the scope of the cover or the exemptions, so when a claim is made and they're told they don't qualify they're incensed. Just getting their premiums back doesn't compensate them, they feel.'
Dr Farrand adds that insurance cover may not necessarily last the full term of the loan. 'I have had one or two cases where insurance companies have cancelled policies at the crucial moment. In one case last year, a chap had credit protection insurance and wrote to his insurer that he was going to be made redundant in three months' time. The insurer then exercised its right to cancel the policy at a month's notice,' he says. (He decided the case in the borrower's favour).
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