Sam Dunn: Just bought loan cover? It's not your lucky day

The potential for mis-selling means PPI could be financial services' next big scandal
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The Independent Online

Most borrowers will be familiar with a prickly fear that they might not be able to pay back the money they have been loaned.

Most borrowers will be familiar with a prickly fear that they might not be able to pay back the money they have been loaned.

There is always a risk that your personal circumstances could take a nasty turn for the worse, leaving you and your family unable to repay a personal loan, mortgage or credit card bill.

So it's not surprising that many of us take out insurance to help pay the bills if we lose our job, fall seriously ill or suffer an accident. But disquiet is growing over the sale of these payment protection insurance (PPI) policies, in particular those linked to unsecured personal loans.

Millions of people every year take out such loans. Banks shift insurance policies to go with them by the barrowload, making fat profits for themselves and fat commissions for their sales forces.

Recently, however, fierce competition in a market characterised by low interest rates has squeezed lender margins. Selling PPI has thus become ever more important to banks. One UK banking chief recently conceded that, with such highly competitive loans on offer, lenders were in danger of making a loss if they failed to sell the insurance as part of the deal.

When a bolt-on piece of finance in effect becomes more important than the product itself, some serious alarm bells should be ringing.

Last week, a scathing report on the UK credit industry by the Which? consumer group put another heavy boot into PPI. It revealed that lenders generate £1bn a year in commission on PPI policies.

And that, it suggests, is a conservative estimate.

Not only is the insurance overpriced, but the report also brands it "useless" for many of those who buy it. In addition, Which? warns that sales staff often have inadequate training and fail to point out exclusions in the policies.

Most PPI policies won't pay out if you're unemployed when you take out the loan, or if you're self-employed, working as a temp or on a short-term contract, or if you have an existing illness.

Many people shell out hundreds of pounds for cover on a £5,000 loan only to discover on making a claim that it is disallowed, leaving them in dire financial straits.

In other cases, borrowers may purchase PPI they don't need since they already have income protection insurance through their employer.

Of course, the unsuitable or unnecessary insurance shouldn't have been sold in the first place. But the unholy mix of poor sales practice, slipshod regulation and consumer ignorance means the above scenarios are all too common.

PPI will fall within the aegis of the Financial Services Authority (FSA) when new regulation kicks in on Friday. But it is feared that customers still won't be able to make much more of an informed choice.

Although the Financial Ombudsman Service will offer a channel for redress in the event of a problem, there will undoubtedly be plenty of room for the lenders to try to wriggle out of their responsibilities.

The potential for mis-selling of PPI has even prompted Which? to suggest that it could be the next big scandal in the financial services industry.

To be fair, in many cases, PPI pays out to those in difficulty. But the fact remains that it continues to be sold to many people who don't need it.

An official inquiry into PPI by the Office of Fair Trading or the Treasury Select Committee would shed light on this murky part of the insurance market.

No bonus points

With-profits annual bonus announcements are here and stock markets are rising, but that's scant cheer for policyholders. Despite the upturn, payouts will in many cases be less than last year.

With-profits companies always hold back some of the gain made when the market rises in order to provide a cushion when it falls - a process known as "smoothing". But actuaries warn that investors will have to put up with this year's raw deal - and expect more of the same later. They put the blame on FSA solvency requirements, which have forced life assurers to offload shares in falling bond markets, and thus miss out on recent equity rises.

That explanation won't comfort policyholders. They will see the markets bouncing back after the downturn and reach a despairing conclusion. The good news has turned bad.

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