The storm clouds are gathering over Ireland's controversial payment protection insurance sector as the Central Bank starts talking tough and orders a comprehensive review, writes CONOR POPE
Why are payment protection insurance (PPI) schemes back in the news again?
Yesterday the Central Bank named six lenders it has ordered PPI sales reviews from. Another, as yet unnamed lender, is also to review its practices. The Central Bank warned those involved that they will face penalties over dodgy sales. The six named lenders reviewing sales going back to 2007 are Bank of Ireland, AIB and its subsidiary EBS, GE Money, Ulster Bank and Permanent TSB.
What does the bank mean by penalties?
The director of consumer protection at the Central Bank Bernard Sheridan said lenders who mis-sold PPI would have to return all premiums and any interest which could have been earned on the money spent on the policies. It could cost the banks hundreds of millions of euro if the experience in other countries is anything to go by.
What are PPIs again?
They are schemes which promise to pay off credit card debts or other loans if you fall sick or lose your job. About 340,000 such policies were sold here from August 2007 to November 2011. The insurance sounds good in theory, but there are growing concerns that it offers very bad value for money and fears are mounting that thousands of consumers have been mis-sold for almost a decade.
Complaints to the Financial Services Ombudsman about PPI have almost doubled since the beginning of the year and while the numbers complaining are still relatively small – up from 218 to 410 – it seems likely that many thousands were ripped off by banks when buying such policies.
How much do they cost?
Sometimes absolutely ridiculous amounts. Some credit card providers charge a monthly premium of about 71 cent for every €100 owed. That may not sound like a lot but it works out at an annual interest rate of 8.5 per cent, which, if added to the typical AER on a credit card of 15 per cent, pushes up the total cost to 23.5 per cent.
PPI for personal loans is as expensive, and taking out such a policy on a five-year loan of €10,000 could end up costing more than €2,000.
And what do I get for that?
Sometimes very little. Some PPI policies provide cover only for the minimum monthly repayment amount – anywhere between 2 and 5 per cent of a credit card balance – and they’ll only pay that meagre sum for a limited period.
How and why were the policies mis-sold?
The why is simple. PPI is hugely profitable for banks and the commission rates for salespeople have always been high. The how is more varied. PPI was sold to the self-employed who could not claim against becoming unemployed. Policies were also sold to people who subsequently fell ill as a result of a pre-existing condition, which invalidated their insurance. Some customers were denied loans or mortgages unless they took out PPI. Some were not even unaware they were paying for it. The Central Bank has found a case of an unemployed woman being sold a PPI policy to cover repayments on a loan. She would never have been able to make a claim due to her unemployment status at time of sale. A man working just 16 hours per week was also sold a policy, despite the fact he would never have been able to make a successful claim due to the requirement that a person must work at least 18 hours per week.
What prompted the Central Bank to act?
PPIs have been dogged with controversy in the UK in recent years after widespread mis-selling was uncovered there.
An investigation by the British Competition Commission in 2008 also revealed how profitable PPI was for banks. It found that for every £100 received in premiums for PPI, just £15 was paid out to cover claims. This compares with £78 paid out in car insurance and £54 in home insurance. It also uncovered sharp practices which saw millions of consumers issued with billions of pounds in refunds.
How will I know if I had a PPI?
The first thing to do is check your bank and credit card statements to see if there are any unexplained deductions. Even if you see nothing you might still have a PPI as payments covering the insurance may not be listed separately and may be bundled into loan repayments. If you see nothing obvious but have concerns contact your lender.
Private companies offer to get my money back. Are they legit? There is a slew of companies offering to take on the banks over PPI mis-selling. Some offer a good service, others do not and can charge 25 per cent of the settlement for something a person can do themselves.
What can I do?
If your PPI was with one of the lenders now identified, the Central Bank is advising you to do nothing and let investigations take their course. If you want to act now you can contact the creditor and get a copy of your consent to the PPI policy. Ask for the policy terms and conditions and a statement of how much the premiums have cost. If you believe you have a case, write to the institution in question stating the facts. If you are stonewalled, contact the Financial Services Ombudsman who can look into cases dating back to 2007.
Why only 2007?
In 2007, the sale of PPI became subject to the provisions of the Consumer Protection Code (CPC). Under the code, providers are obliged to quote PPI cover separately to the cost of a loan, and customers must be informed that cover is optional.
However, these requirements only applied to policies sold after the CPC came into effect in 2007. People who have concerns about PPIs going back further than that will have problems getting redress.
What happens now?
While financial institutions will be expected to be proactive in contacting customers, anyone hoping for a speedy resolution will be disappointed. Sheridan said many reviews won’t be done until the middle of next year at the earliest.
