PPI mis-selling dents banks’ profits

Payment Protection Insurance scams have come to light in recent months, as banks put aside huge sums to deal with selling malpractices.

After being widely sold to borrowers for years, Payment Protection Insurance (PPI) has been in the news a lot recently as banks’ profits are hit with hefty provisions to deal with claims of mis-selling.

PPI is an expensive add-on that borrowers may have been sold on a loan taken out from a bank. It’s a type of insurance which is designed to cover loan repayments for up to a year in the event of unemployment, illness or an accident.

The problem is not PPI itself, but rather that it had been widely mis-sold to many who did not require insurance, and in some cases were unaware that they even had it.

What’s more, the cost of insurance is often more than the interest, costing borrowers between 15% and 20% of the loan balance, and is often sold on loans where PPI is worthless.

On average, lenders have paid out for claims on just 15% of loans, meaning that 85% of PPI on loans often goes into the lenders’ back pockets.

Santander UK recently joined the large list of lenders that have set aside money to deal with claims of mis-selling PPI, after revealing on 27 July that it had put aside £528m for compensations.

Both Lloyds and Barclays announced in May that they made provisions of £3.2bn and £1bn, respectively, to cover the cost of claims.

While some borrowers have struggled to make successful claims, others are more likely to have grounds for re-payment if they were sold insurance over the phone or in person, when the seller did not make it clear that PPI is optional and suggested that it was necessary to the loan. Some sellers even suggested that without insurance the loan would be more expensive.

City watchdog, the Financial Services Authority (FSA), has imposed fines on a number of lenders for their part in the mis-selling of PPI, including Alliance & Leicester, Egg, Capital One and Loans.co.uk.

Commenting on the fine, the FSA's director of enforcement, Margaret Cole, said of the scandal: “If those conversations [between loan provider and customer are] unclear or misleading it will be no defence for firms to say that full details were included in paperwork which customers received later.”