David Prosser: Loan insurance is another disgraceful banking scandal

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The Independent Online

Outlook Not since the personal pension debacle of the early 1990s has there been such a systematic attempt to mislead and mis-sell to consumers. What a shame that it is the financial services industry that is once again at fault.

It is rapidly becoming clear that payment protection insurance (PPI) is the latest mega-scandal to have been perpetrated on unwitting consumers by greedy commission-driven salesmen working for banks and insurers, among others. The Independent has repeatedly highlighted the scams going on in the PPI market, but the true scale of mis-selling is unprecedented.

The Financial Ombudsman Services (FOS) said yesterday that it is now receiving 800 complaints a week from people who believe they were mis-sold PPI. It's possible, of course, that these huge volumes have been generated by publicity about problems with PPI prompting opportunistic claims. But the FOS's warning that it is upholding the complaints of 90 per cent of PPI policyholders – 100 per cent in the case of certain firms – is shocking.

The full catalogue of abuses in the PPI market is too numerous to list here. But consumer groups' suspicions about the cover were first aroused by its cost – many loan providers seemed to be bolting on insurance at the point of sale of a mortgage or credit card, with very high premiums then payable alongside repayments. It often wasn't clear what the cover cost, but anyone who made inquiries found it was far more expensive than similar insurance on offer from independent providers.

Bad enough to overprice an insurance policy, but borrowers could at least take comfort in the thought that their debt repayments would be covered in the event that they fell ill or – particularly important these days – that they lost their jobs. Just one problem: it turns out, in many cases, that the overpriced insurance wasn't worth the paper it was written on. Thousands of policyholders have tried to claim on PPI only to discover that their insurers wouldn't pay out.

There are stories, for example, of people being sold unemployment cover despite being in self- employment. Or of people not being warned that almost any pre-existing health problem they had would invalidate their policy, even if a subsequent claim was for a completely different reason.

The final insult to consumers is the way lenders that sold the cover and the insurers that provide it have both tried to pretend that mis-selling has not taken place. For years, the financial services industry insisted that there were only a handful of isolated cases to be concerned about. And the Ombudsman said yesterday that some companies seemed to have deliberately set out to mishandle complaints about PPI.

As ever with mis-selling cases, there is an underlying regulatory failure to worry about here. The Financial Services Authority has, at long last, now taken action on the insurance, insisting that no more single-premium cover is sold and warning lenders that they will no longer be allowed to sell PPI at the same time as a loan. But it took far too long for this action to be taken.

Indeed, consumer groups believe that the FSA would never have considered such draconian sanctions on PPI were it not for the changes in attitude forced upon the regulator by the credit crunch. Having messed up so badly on scandals such as the collapse of Northern Rock, the FSA has now begun taking a much more hard-nosed approach with those it polices.

Nevertheless, the human cost of this scandal is only just beginning to be appreciated. Today, official figures on unemployment are almost certain to top 2 million for the first time in more than a decade. A good number of those who find themselves out of work through no fault of their own will find some solace in the thought that they have at least had the foresight to insure against this eventuality. Many will then discover, to their horror, that these policies won't pay out after all.

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