Banks face MPs' inquiry into mis-selling of PPI policies

Complaints about payment protection insurance are still pouring in, reports James Daley

The Treasury Select Committee is set to launch an inquiry into the sale of payment protection insurance (PPI), after a string of reports revealing that the product is being widely mis-sold.

The Treasury Select Committee is set to launch an inquiry into the sale of payment protection insurance (PPI), after a string of reports revealing that the product is being widely mis-sold.

The committee, led by the Scottish MP John McFall, has already voiced concerns about the adequacy of the rules governing PPI earlier this year. However, its calls for a full-scale review of the sector were dismissed by the Financial Services Authority, which began regulating insurance products in January.

Since then, however, complaints about PPI have continued to pour in. And the committee, which last year forced Barclaycard into embarrassing revelations about the cost of its credit, will begin a new session when Parliament reconvenes next week.

Consumer groups and insurance brokers claim that banks and building societies are inflating profits by pushing insurance policies that are often of no use to their customers. In the latest case, this week, Lloyds TSB was accused of mis-selling PPI.

About 25 million PPI policies are sold every year - usually alongside personal loans, credit cards and mortgages. In some cases, they are sold as a compulsory add-on to a loan, and can increase the repayments by hundreds of pounds.

The insurance is designed to cover borrowers' loan-repayments in the event that they are unable to work due to illness, injury or unemployment. However, unlike most other protection products, the policies are not priced according to individual circumstances.

Most of the policies sold by banks and building societies come with onerous terms and conditions. Consumers are rarely warned that pre-existing health problems will not be covered, for example, or that self-employed people cannot claim if their businesses fail.

Most bank PPI policies also have an excess period of 60 days, meaning that they won't make the first payment until 60 days after the claim has been made. Policies bought through an independent broker, by contrast, tend to start paying out from day one. In addition, PPI policies rarely pay out for conditions such as stress, depression and back or neck pain, even though these account for more than half of all medium- or long-term absences from work.

Simon Burgess, the managing director of Burgess, the specialist insurance broker, says that in most cases, PPI is simply not worth buying. "For most personal loans, I'd advise people not to bother with PPI - use the money to pay back your loan quicker instead," he says. "But if you are going to take it out - because you want the peace of mind - then take it from an independent adviser rather than getting ripped off by the banks."

Although the FSA's appointment as regulator of the insurance sector should theoretically improve consumer protection, the change appears to be having the opposite effect. Under the new rules, banks are able to take a "non-advisory" stance, pushing customers towards PPI without giving them full advice.

Mike Naylor, a principal researcher for Which?, the consumer group, warns that customers should be particularly wary of banks selling PPI for credit cards. "PPI on credit cards is even less useful. It tends only to pay out for 12 months, and often only covers the minimum payment each month. And they will still charge you 70p to 90p per £100 of your loan every month. So, on a £1,000 loan, that can equate to almost £10 a month. Although PPI is now regulated by the FSA, we are concerned that the new regulations aren't going to stop companies mis-selling."

Kevin Carr, the senior technical adviser for Lifesearch, a specialist broker, has been lobbying to get some more sensible regulations pushed through. "The majority of mortgage lenders in the country are putting what is profitable above what is suitable for their customers," he says.

"Our understanding of [the FSA's] 'treating customers fairly' [initiative] is that if an adviser is recommending one product, he must give due consideration to alternatives. In the case of PPI, income protection insurance is an alternative. But most banks don't sell it because it's not as profitable."

Banks such as Lloyds TSB and Barclays make more than 10 per cent of their UK profits from PPI alone. They now face a Treasury Select Committee investigation.