A dangerous liaison for debtors?

Julian Knight investigates a highly controversial payment protection scheme

Possibly the two most controversial financial products on sale in the UK are payment protection insurance (PPI) and individual voluntary arrangements (IVAs). PPI promises to cover the cost of a loan if the policyholder is off work through illness or is made redundant. An IVA is a type of insolvency where the struggling debtor comes to an agreement with his or her creditors under which they have to repay a proportion of what they owe, sometimes as little as a quarter.

Why are these products so controversial? Consumer groups say PPI is too expensive and has too many policy exclusions. (For example, it can be unsuitable for self-employed people.) The sale of this type of insurance has been dogged by mis-selling scandals, with several big providers fined by the regulator, the Financial Services Authority.

IVAs have had an equally bad press. Firms managing them on behalf of debtors – and charging high fees for doing so – have been accused of selling them to people who would be better off going bankrupt or coming to an informal agreement with their creditors. Concern reached a peak earlier this year, when IVA companies had to sign up to a protocol promising the banks – ie, the creditors – that they would be more careful about whom they sold the agreements to.

Now one insurance firm, DMS, through its website, protectiva.co.uk, has decided to marry IVAs and PPI together, offering payment protection insurance on an IVA. The big idea is that if the policyholder cannot meet their debt repayments due to ill health, redundancy or accidental injury, then the PPI will do it for them.

"IVAs last up to five years and are a major lifestyle commitment," says John Tegg, managing director of DMS. "Can you imagine if you made all your IVA payments for four years and then got ill or were made redundant and the IVA failed as a result?"

Defaulting on an IVA can have serious consequences. "In effect, you go back to square one and owe the full amount plus interest," says John Fairhurst, managing director of Payplan, which provides IVAs for no fee and is funded by the banks.

As for premiums, Mr Tegg says they can be lower than many standard PPI policies sold with personal loans or credit cards.

But Frances Walker from the Consumer Credit Counselling Service, a debt charity, is one of many critics who think that taking out PPI on an IVA is a waste of time. "I doubt creditors would want you spending money that should be going to them to repay your debts on insurance premiums. People who can't meet their IVA payments should go back to their IVA provider and ask them to renegotiate with the creditors."

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