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The problem with PPI

PPI is a form of insurance designed to protect the borrower should they be unable to work due to accident, sickness or unemployment. Millions of PPI insurance policies have been taken out over the last several years.

PPI is now a big talking point. One of the major reasons for this is because the UK population is aware of the widespread mis-selling of these policies. We all know about the endowment mis-selling scandal of the 90s and now we have yet another scandal that is more widespread. It appears that many financial organisations have not learned the lesson of past misdemeanours.

So what is the big deal about PPI? Well, the fundamental problem with PPI is that it is an expensive and inflexible insurance policy. Single premium PPI is rolled up into the loan from the beginning. What this means is that the PPI insurance attracts interest as well as the loan.

Lenders need to make customers aware of the main features of their products. One huge disadvantage with PPI is that it is so expensive. Instead of one monthly affordable payment, consumers are having to borrow more to pay for the insurance. Additionally, if the borrower wants to pay off their loan early, they lose a lot of the money that has been paid into the payment protection plan.

Another aspect of misselling is that many of these loans extend beyond the five year period of the insurance policy. This means that anyone taking out a longer loan, say 180 months, would only be covered by the PPI for the first 60 months of the loan. The consumer would then be left without cover for the rest of the loan period.

Another major concern with PPI is that it only pays out in certain circumstances. Some medical conditions are excluded, especially pre-existing medical conditions known to the customer at the point of sale. Further, any customer who was not in full time employment will certainly find it difficult to claim for unemployment.

However, the problem isn’t just with the insurance policy but the way it was sold to people. One such issue is that people were led to believe that they would not get the loan unless they took out the policy. People who take out loans often need the money quickly so they are often at the mercy of pusy salespeople and are pressured into accepting whatever recommendation is put to them.

The FSA has cracked down on the sale of payment protection insurance. It wrote to major lenders in February 2009 asking them to withdraw the sale of the product as soon as possible and no later than 29 May 2009. The regulator is focussed on how the product is sold and whether the sales process is fair to consumers.

More recently, the FSA has stepped up its intervention into the sale of PPI. It has issued new guidance regarding the way lenders are treating complaints about PPI and has also ordered a review of previously rejected complaints.

Several lenders have already been fined by the FSA due to the poor sales practices. Now other lenders are very much aware that they need to get a firm grip on their own processes if they are to avoid a similar fate.

Instead of buying a single premium policy it is possible to buy a standalone policy. These policies tend to have less stringent conditions for making a claim and also tend to be less expensive. They are not rolled up into the cost of the loan so the customer could easily cancel the policy at any time without losing out financially. Having said that, with all insurance policies, it is worth checking the small print to see whether there are circumstances where you are not covered by the policy.

So what does someone need to do if they discover they have been missold PPI? To start with it’s worth seeing whether your policy was sold before 14 January 2005 or after this date. Anything sold before this date is classed as an unregulated sale and will be subject to different rules. What this means to the consumer is that they need to be aware when making a complaint whether the sale of the policy is classed as an “advised” sale or a “non-advised” sale.

Once this has been established, the consumer will then need to ensure that they have the documentary evidence relating to their claim. The most important details to have are the loan agreement number, the date of sale of the policy, the term of the loan and the total cost of the insurance policy.

A complaint will need to be carefully drafted based on the consumer’s personal circumstances at the time of sale. It can also be helpful to have a basic understanding of the Statute of Limitations Act, the Misrepresentations Act and the ICOBS provisions as they relate to payment protection contracts.

Customers need to understand that a complaint may not go the way they planned it. There are rules governing what constitutes a final decision and there may be options which allow the consumer to appeal against the decision. In some circumstances, complaints can be appealed through the Financial Ombudsman Service, which itself has different levels of appeals.

To make the whole issue easier, anyone can engage the services of a claims management company who can deal with their mis sold payment protection claim on their behalf. A claims company will usually know the ins and outs of making a complaint and should have the necessary experience and expertise to make a large number of successful claims. Some consumers may not have the time and energy for a protracted battle with their lender, so leaving it in the hands of a specialist company may be a good option to take.

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