Car crashes are not instant: you can see the vehicles about to collide, the awful realisation there’s going be a smash. The moment passes in slow motion. Imagine then, a car crash that takes years to happen (or, rather, millions of individual crashes over five years) without being able to stop it. This is how consumer journalists have felt watching the dismal spectacle of |payment protection insurance (PPI) – one of the most egregious ways yet found by financial institutions to fleece the public of their money. Admittedly, no lives have been lost in this disaster but it has conned billions out of customers out and probably left some losing their homes.
Briefly, PPI covers payments on a mortgage, loan or credit card in the event of the borrower being made redundant or falling ill. About 13 million policies are in force, taken |out to guard against life’s vicissitudes. But PPI is not a sensible form of
insurance, it’s a racket. Only 14 per cent of premiums are paid back to claimants, compared with 54 per cent for home insurance and 78 per cent for motor insurance.
The payouts are so small because PPI is overpriced, missold through high-pressure tactics and riddled with caveats that make it difficult to claim, even if you do lose your job or fall ill. The devil is in the small print: policies exclude claims for stress or back problems, the two most common causes of illness, and claims by the self-employed and those with existing medical conditions. Even when policies do pay out, they do so for a limited period, say six months, even if the underlying problem is continuing.
Customers have been complaining about PPI for years. This week, the Financial Services Authority (FSA) ordered banks to improve their response and forecast that 550,000 people would lodge complaints about PPI for each of the next five years. “Since we took over the regulation of PPI, we have carried out 24 investigations and three thematic reviews, issued warnings ... visited over 200 firms, and handed out some very significant fines,” said Dan Waters, the FSA’s director of conduct risk. “Now, with
this package of measures, we are confident we can mend a market that has been broken for too long.”
Mr Waters talks a good game but the truth is that the FSA and the Competition Commission have flunked quick action on one of the worst financial debacles of recent years. PPI is a slow-motion scandal.
Citizens’ Advice made a “super complaint”, warning of outrageous prices, limited cover and poor claims handling, in September 2005. The Office of Fair Trading took 16 months to pass the complaint to the Competition Commission. Acting with the speed of a sloth on tranquillisers, the commission issued its “emerging thinking” four months later, in November 2007. “After examining a substantial amount of evidence, we think there are some areas we need to explore further,” Peter Davis, the inquiry chairman, said.
Fast-forward, or rather slow-forward, to 2008 and the Competition Commission found the public was being overcharged by £1.4bn a year. We are still waiting for its final report, which is expected in late |September, or perhaps October.
Meanwhile, banks are rejecting half of the complaints made about PPI, unlike the Financial Ombudsman Service, which backs 81 per cent of complainants. In the past five years, by the Competition Commission’s conservative reckoning, providers of PPI have overcharged by £9.8bn. We don’t know how much they have paid out in compensation, but about 100,000 cases lodged with the Ombudsman have been settled at a cost of £150m. The FSA expects 2.75 million complaints by 2015. So far the PPI industry is probably “up” by £9bn. And those fines the FSA was mentioning? They total just £13m.
Heroes & villians
Hero: Financial Ombudsman
While the Financial Services Authority and energy regulator Ofgem should be ashamed of their failures to tackle rogue corporations, one organisation offers the public a free and effective way of tackling misdeeds: the Financial Ombudsman Service. The FOS is expecting an avalanche of claims for missold PPI.
Villain: Pizza Hut
Pizza Hut has stopped its calorie count trial, saying diners found it too “confusing”. Other fast-food joints have also failed to embrace the Food Standards Agency’s idea, including KFC, Burger King and McDonald’s. While no one thinks pizza is a health food, hundreds of calories separate the fattiest from more slender options.