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Last Updated: Friday, 7 April 2006, 10:38 GMT 11:38 UK
The UK's 5bn 'protection racket'
By Bill Garrett
BBC Money Programme

It's an incredibly successful 5bn industry with 20 million customers. But it's so worrying consumer watchdogs that it's been called a "protection racket" - and you may well have been the victim.

Money programme
The most expensive protection Moneyfacts found was 1300

If you've ever taken out a mortgage or loan, or hold a credit card, you've probably been offered Payment Protection Insurance, or PPI as it's called.

It's meant to help you if you become ill or get made redundant, so that you can meet your repayments, but all too often, it's letting people down.

And the banks are making a fortune in profits on these much-criticised policies.

This week, the Office of Fair Trading started its investigation into the industry, an investigation prompted by a "Super Complaint" submitted late last year by consumer watchdog Citizens Advice, in which they branded the industry a "protection racket".

It's supposed to work like this: you take out a loan or mortgage, or perhaps credit cards, and with the credit you take out insurance. It's supposed to protect you in case your circumstances change, you lose your job, or you become ill and unable to meet your repayments.

For every pound paid in as a premium, the PPI schemes were paying out just twenty pence in claims

It sounds straightforward enough. But according to government figures, one in every four who claim on their insurance get turned down.

The irony is that the insurance itself can be a pricey add-on to the original loan and compound the debt problem for this particularly vulnerable group.

Covered or not?

In one case, the Barry family of Luton took out "Paymentcare" plan with their bank, Abbey National. It covered their mortgage and a few other monthly outgoings.

As Gill Barry put it, "It gave us some sort of relief... thinking that we were safe, that if he were ill, we wouldn't be endangering our home."

Eighteen months after taking out the policy, Alan Barry was struck by a bout of his life-long epilepsy. He ended up off work.

In many cases, people have actually told the lender about their circumstances and there's enough information there for the lender to think this isn't appropriate, but they've sold it anyway
Peter Tutton, co-author of the Citizens Advice report into PPI

When they claimed, they were refused. Despite the bank knowing about his medical history, they refused the claim, saying that it was a pre-existing condition and therefore not covered.

Mr Barry's case is not unique.

Peter Tutton, co-author of the Citizens Advice report into PPI, said: "In many cases, people have actually told the lender about their circumstances and there's enough information there for the lender to think this isn't appropriate, but they've sold it anyway."

Abbey says that in Mr Barry's case, it "did not mis-sell him a Paymentcare policy. It is Mr Barry's responsibility to read the application form and policy documents to ensure it is accurate and suitable for his needs."

The expense of this insurance is another area that may not be clear to many borrowers, so in an attempt to understand the cost of various policies, the BBC Money Programme asked Moneyfacts to carry out a survey on a 5,000 loan taken out over three years. The results were surprising.

For a product sold as an afterthought, customers would be handing over a huge amount. The most expensive Moneyfacts found was 1,300 just for the insurance and its associated interest - more than a quarter of the amount borrowed and adding a hefty 36 to monthly repayments.

Shopping around, you could buy a policy from an independent provider with similar cover for just over 200.

Lengthy process

The investigation by the OFT will look at all aspects of PPI, including how it is sold and the cost and value of the cover, but it is likely to take some time.

With further regulation a possible outcome, the banks are worried that any clampdown could hit their profits.

Person holding up a credit card
Consumers need to read the terms and conditions for cards and loans

The importance of this controversial product to the banks should not be underestimated. Research has suggested that the major banks use PPI revenues to prop up their profits.

Mark Thomas, analyst at stockbroker Keefe Bruyette & Woods, gives the obvious value for the online bank, Egg: "Egg as a company loses money on everything it does combined, except for the sale of PPI insurance. It is solely because of PPI insurance that Egg makes money. "

For their part, the banks insist that the Payment Protection Insurance is a valuable product for borrowers. Stewart Dickey, a director of the British Bankers' Association representing the High Street lenders, feels that the lending community is behaving responsibly.

"I'm convinced they've got their act together, they're revising their documentation and they are constantly trying to improve the transparency of the sales process," he says.

Max Flint hosts the Money Programme's Protection Racket Awards on Friday, 7 April 2006 at 1900 BST on BBC2 and asks whether the PPI Industry are listening to the criticism and cleaning up their act.

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