An issue that has claimed many headlines over the last 12 months is payment protection insurance (PPI), a product that has been widely sold across the financial services industry for many years. PPI is the most complained about insurance product ever sold in the UK and financial services companies are setting aside billions to repay those who were mis sold PPI.
What is PPI? Payment protection insurance (sometimes called 'loan protection') covers loan or debt repayments in the event of certain problems – for example, if you are unable to work because of illness or if you are made redundant. How these policies work and the benefits they offer, vary from organisation to organisation and from policy to policy. Payment protection policies are usually sold as part of a deal when consumers take out a loan, mortgage or credit card.
Why are people complaining? It has come to light that hundreds of thousands of policies may have been mis-sold to consumers for lots of different reasons – the two main ones being: 1) consumers have tried to make use of their policy by claiming on it and have been turned down, often due to small print they were unaware of; 2) consumers did not actually know they had taken out the policy or it was 'forced' on them at the time they took out the core product, such as a loan or mortgage.
Why is this such big news? Not only do financial services organisations have to pay back the premiums on mis-sold products they also need to redress the customer with any necessary interest forgone. The estimated cost to the industry currently standards at £6bn and is rising.
Also, claims management companies (CMCs) are providing advice and servicing consumers' complaints on their behalf. There are now around 800 CMCs which advertise strongly to complete the customer's complaints for them, often taking 25% or more from the average £3,000 payout. CMCs have received a lot of bad press recently. Which? provides the following advice about CMCs: "If you have a complaint against a financial services company then there is no need to spend money employing a claims handler. There are already simple processes in place for resolving complaints consumers can use themselves without the help of a claims company and the often high upfront fees they charge."
What are the implications of PPI for financial services organisations? Many organisations have had to respond to the deluge in volumes of complaints by offering consumers who took out a policy, a payment regardless of whether or not they were mis-sold. The cost of administering and processing complaints is spiralling as volumes of complaints raise. The CEO of Lloyds stated recently that claims management companies submitted 45% of the claims the bank received in February and March. Of the claims submitted by these firms, 25% were from people without Lloyds products. All of these complaints require administration and processing, which is an extremely costly business and considered a financial drain for many.
And my moral question to you readers... if you took out PPI aware of the terms of the policy, would you complain anyway, knowing that you could receive compensation?
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