PPI: Your questions answered

Lloyds Banking Group was this week applauded for scrapping sales of much-criticised payment protection insurance (PPI) to customers who borrow money through its mortgages, loans or credit cards.

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While existing customers with PPI policies will not be affected by the change, anyone approaching Lloyds’ brands, including Lloyds TSB, Halifax, Bank of Scotland and Cheltenham & Gloucester, will not now be offered the cover alongside their accounts.

Tim Moss, moneysupermarket.com’s head of lending, said: “Between them, these brands represent about 36% of the personal loan market, so this will have a huge impact.”

The news has been given an ecstatic welcome by campaigners against PPI, which in the past has been widely mis-sold and was estimated at one point to boost banks’ profits by up to £5 billion a year.

Television consumer champion Martin Lewis said he was "jumping for joy", while consumer pressure group Which?, a long-standing PPI critic, said it was the beginning of the end for cover of this kind.

"Lloyds decision to stop selling PPI is a huge victory for consumers," said Which? chief executive Peter Vicary-Smith. "Hopefully other banks will follow suit."

However, Tim Moss is concerned that people who could benefit from PPI may miss out as a result.

He said: “I have always said that PPI is a useful product for some, but the high premiums and dodgy sales tactics employed by the lenders have given it a very bad name.

“My concern is that people with little job security who could benefit from one of the much cheaper policies offered by standalone providers may lose out if this is the case.”

Here, we answer your questions about PPI and examine why Lloyds has decided to scrap such a huge money-spinner.

What is PPI and why is it so unpopular?

PPI is supposed to help people to continue meeting their loan, mortgage or credit card repayments if they fall ill or lose their jobs.

However, policies are often riddled with exclusions and the cover sold by the banks has also come under fire for being over-priced.

“The margins made by the banks on PPI policies are thought to be about 90%,” Tim said.

Other criticisms leveled at banks offering PPI include the automatic inclusion of the cover in loan repayments and the mis-selling of policies to people who would never be able to make a claim because they are self-employed, for example.

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Why has Lloyds decided to stop selling PPI now?

The PPI market has come under scrutiny from the Office of Fair Trading, the Financial Services Authority and the Competition Commission, which decided to impose a seven-day cooling-off period to prevent banks and building societies pushing PPI on to customers when they applied for credit.

A number of lenders have been fined for poor PPI sales practices. Alliance & Leicester, for example, had to pay £7 million in 2008 and has since stopped offering PPI alongside loans and credit cards.

The burden of complaints prompted by sales of the insurance has also proved heavy for the banks.

In the past year, PPI accounted for about a third of all new complaints submitted to the Financial Ombudsman Service, around 80% of which are upheld at huge costs to the banks. Since the start of April this year, there have been almost 21,500 PPI cases, with almost 2,000 last week alone. The ombudsman has said it hopes the new rules will result in a fall in the number of complaints.

The sales volumes banks can hope to hit selling PPI seven days after a credit agreement are also likely to be very low.

“People are not going to buy insurance after the event,” Tim said. “Coupled with the hassle of dealing with PPI complaints and the cost of compensation, that is why lenders such as Lloyds are moving out of the market completely.”

I think I have been mis-sold PPI. What should I do?

If you believe you might have been mis-sold PPI alongside your credit card, store card or loan in the past six years, your first move should be to write to the lender concerned.

You may receive an initial letter after three or four weeks indicating your claim is not likely to succeed, but you can write again confirming your complaint if you feel your case is valid.

If you are not satisfied with the lender’s response — or they have failed to respond within eight weeks — you can then take your case to the Financial Ombudsman Service. Call 08000 234567 for more details.
 
I did not realise I was taking out PPI alongside my loan/mortgage/credit card. Can I get a refund?
You are likely to have your mis-selling complaint upheld if you have been paying for PPI that you did not even realize you had.

Adding PPI to a £7,500 five-year loan could cost an additional £3,000. It therefore makes sense that consumers who complain to the Ombudsman receive an average refund of £3,000, although some borrowers with larger loans have received up to £25,000.

However, only 16% of people whose PPI complaint is rejected by a bank take their case to the Ombudsman, so the message is to follow your complaint through if you want your money back.

Can taking out PPI ever be a good idea?

PPI, which will cover your debt repayments in the case of loss of income, can sometimes prove extremely useful if you do not have cover for this, through your employer for example.

However, you should always go to a standalone provider, rather than buying it through a lender.

Tim said: “The cost of PPI through a specialist insurer can be as little as one tenth of the cost through a bank, and the policies are also much more flexible, allowing you to cover all your debts, or just one commitment such as your mortgage repayments.

“It may prove a very sensible move given the continuing financial stability issues.”

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