Page last updated at 12:30 GMT, Thursday, 13 November 2008

What's the story with PPI?

The industry says PPI is vital during times of economic downturn

The Competition Commission's proposals for the sale of loan insurance are the latest stage of a long-running row over the controversial policies.

Consumer groups say millions of people have been mis-sold payment protection insurance (PPI) in recent years.

The Commission's report suggests that the sale of PPI at the same time as a loan is preventing customers from shopping around and pushes up the cost.

But the industry says these policies are vital at a time of economic downturn.

So what exactly is PPI?

This insurance covers repayments on loans if the borrower is unable to because of loss of earnings caused by accident, illness, unemployment or death.

It is totally without conscience to encourage people to borrow without back-up
British Bankers' Association

About 13 million PPI products have been sold in the UK. In 2006 alone, the UK public paid 4.4bn in premiums.

In the majority of cases, policies cover repayments on mortgages, personal loans and credit cards.

Sounds like a good idea, what's the problem?

The industry claims that these policies are particularly important at a time when more people are losing their jobs.

But these products have been dogged by controversy. The Financial Ombudsman Service said PPI was by far the biggest source of consumer complaints.

Alliance and Leicester was recently fined a record 7m for putting pressure on customers to buy PPI they did not want or need.

Consumer group Which? estimated that across the industry, up to two million people were rushed into buying PPI only to find they could not claim what they expected.

Citizen's Advice described the system as little more than a "protection racket", claiming many customers were overcharged, or did not even realise they were taking out a policy at all.

It was so concerned that it submitted a super-complaint to the Office of Fair Trading, which asked the Competition Commission to investigate.

What has the Commission found?

It said that in 2006, of the 3.5bn of the insurance sold by 12 largest sellers, 1.4bn was "excess profit" for the banks and institutions that sold the policies.

It seems to suggest that one of the biggest problems was that customers were sold PPI at the same time as getting the loan.

This prevented them from shopping around for cheaper deals, or even being aware they could go elsewhere.

The Commission is proposing that there is a 14-day cooling off period before the provider of the loan can sell PPI to that customer.

But within that two weeks, the customer can take the initiative and approach the provider to ask for PPI or buy a policy from an independent provider.

A range of other proposals includes a ban on policies that, in effect, simply add the cost of PPI to the total debt.

An annual statement would allow people to review their policies and switch if they thought they could get a better deal elsewhere.

How has the industry reacted?

With fury.

Most providers say that the 14-day window could leave customers unprotected.

They say the delay would mean that many people would not bother getting insurance cover for repayments, at a time when people's risk of unemployment was greater.

The Finance and Leasing Association argued that these proposals would result in the cost of credit going up.

What happens now?

These proposals will now go back out to consultation.

The Commission is expecting to publish its final report in mid-January.

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