David Prosser: Back the PO to stamp out PPI scams

Just how do you protect customers when they're sneakily being sold something that is presented as a cheap optional extra, even though it can actually end up costing more than the product they really want?
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That's the question facing the Office of Fair Trading, which is investigating the payment protection insurance (PPI) market after complaints from consumer groups. PPI is one of the murkiest areas of the financial services industry, as well as one of the most lucrative for providers.

The insurance is routinely sold by mortgage lenders and credit-card providers, and alongside unsecured loans. Not only is the cover overpriced compared to deals available on a stand-alone basis, but many borrowers have found their policies riddled with small print when they've needed to claim.

The problem does not lie with PPI itself. In theory, it can be sensible to buy insurance that will protect you if you can't keep up with debt repayments because of ill-health or a period of unemployment.

More troublesome is the aggressive way in which PPI is sold. Lenders routinely bolt the premiums on top of credit products, unless borrowers insist they don't want it, and rarely explain any exclusions for which policyholders will not be covered.

The OFT's investigation is not due to reach firm conclusions for several months yet, but its consultation period ended on Thursday. One excellent idea has already emerged; the Post Office suggested that lenders selling PPI should have to give customers a health warning, which would operate in a similar way to the open market option rules in the personal pension industry.

In that business, pension providers are legally obliged to tell savers approaching retirement that the annuity product they offer - which is how a pension fund is turned into a regular income - may not be the best on offer. The idea is to encourage savers to check whether a better pension might be available from other providers.

The Post Office suggests that lenders selling PPI should be obliged to do the same thing. They would be free to sell insurance alongside their loans and credit cards, but would have to warn borrowers that a better deal might be available elsewhere.

Naturally, the Post Office has an axe to grind. Earlier this year, it launched its own PPI policy, for which sales have been slow, despite the fact that most independent advisers believe the product is one of the best on the market.

If lenders have to tell customers that they may be able to get cheaper PPI from stand-alone insurers, providers such as the Post Office stand to benefit. However, the fact that it is in the Post Office's commercial interests to encourage people to seek out a better deal on PPI does not undermine the appeal of its idea.

At the moment, lenders are preying on customers' ignorance about their options. If borrowers were more aware that they might get better value elsewhere, they would have only themselves to blame if they ended up with a poor deal from their lender.

nnn Figures from the Royal Institution of Chartered Surveyors, published on Thursday, suggest that the average first-time-buyer couple now need £29,000 for a deposit and stamp duty charges to get on the housing ladder.

Innovative products from mortgage lenders, designed to help struggling borrowers, are to be welcomed, of course, even if the latest initiative from Kent Reliance Building Society (see opposite page) seems a little hare-brained.

But the Government can help. Its Homebuy scheme, though limited in coverage, is a genuinely good idea (so much so that David Cameron has pinched it).

If you live in London, the Affordable New Homes Show next Friday, with stalls from more than 20 housing associations, explains how the scheme works and offers free independent financial advice; see www.housingoptions.co.uk for details.

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