Payment Protection Insurance in the United Kingdom: History
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Subjects: Others
Contributor:

• telesales
• industrial scale
• financial difficulty

## 1. Calculations

The price paid for payment protection insurance can vary quite significantly depending on the lender. A survey of forty-eight major lenders by Which? Ltd found the price of PPI was 16-25% of the amount of the debt.

PPI premiums may be charged on a monthly basis or the full PPI premium may be added to the loan up-front to cover the cost of the policy. With this latter payment approach, known as a “Single Premium Policy”, the money borrowed from the provider to pay for the insurance policy incurs additional interest, typically at the same APR as is being charged for the original sum borrowed, further increasing the effective total cost of the policy to the customer.[1]

Payment protection insurance on credit cards is calculated differently from lump sum loans, as initially there is no sum outstanding and it is unknown if the customer will ever use their card facility. However, in the event that the credit facility is used and the balance is not paid in full each month, a customer will be charged typically between 0.78% and 1% or £0.78 to £1.00 from every £100 which is a balance of their current card balance on a monthly basis, as the premium for the insurance. When interest on the credit card is added to the premium, it can become very expensive. For example, the cost of PPI for the average credit card in the UK charging 19.32% on an average of £5,000 each month adds an extra £3,219.88 in premiums and interest.

With lump sum loans PPI premiums are paid upfront with the cost from 13% to 56% of the loan amount as reported by the Citizens Advice Bureau (CAB) who launched a Super Complaint into what it called the Protection Racket.

PPI premiums as proportion of loan: cases reported[2]
Unsecured personal loan £8,993 £2,217 25%
Unsecured personal loan £11,000 £5,133 47%
Hire purchase for car £5,059 £2,157 43%
Hire purchase for car £6,895 £2,317 34%
Unsecured loan £5,600 £744 13%
Secured loan £25,000 £12,127 49%
Secured loan £35,000 £10,150 29%
Conditional sale for car £4,300 £2,394 56%

When interest is charged on the premiums, the cost of a single premium policy increases the cost geometrically. The above secured loan of £25,000 over a 25-year term at 4.5% interest costs the customer an additional £20,221.74 for PPI. Moneymadeclear[3] calculates the repayment for that loan to be £138.96 a month whereas a stand-alone payment protection policy for say a 30-year-old borrowing the same amount covering the same term would cost the customer £1992 in total, almost one-tenth of the cost of the single premium policy.

## 2. PPI Claims

Payment Protection Insurance can be extremely useful insurance; however, many PPI policies have been mis-sold alongside loans, credit cards and mortgages. There are many examples of PPI mis-selling, and as a result may leave the borrower with PPI that is no use to them if they came to make a claim. Reclaiming PPI payments and statutory interest charges on these payments is possible in this case either by the affected borrower or by the use of a solicitor or claims management company.

If the borrower at the time of the PPI claim owes money to the lender, the lender will usually have a contractual right to offset any PPI refund against the debt. If there is any PPI value left over, then the balance will be repaid to the PPI solicitor and or the client.

The first ever PPI case was in 1992-93 (Bristol Crown Court 93/10771). It was judged that the total payments of the insurance premium were almost as high as the total benefit that could be claimed. A 10-year non disclosure clause was put in place as part of the settlement. After 10 years, a copy of the judgement was sent to the Office of Fair Trading and Citizens Advice Bureau. Soon after, a super complaint was raised.[4]

The judicial review that followed hit the headlines as it eventually ruled in the favour of the borrowers, enabling a large number of consumers to reclaim PPI payments. To date, £28.5 billion has been repaid to consumers (January 2018). [5]

In 2014, a PPI claim from Susan Plevin against Paragon Personal Finance revealed that over 71% of the PPI sale was a commission. This was deemed as a form of mis-selling. The Plevin case has caused the banks and the Financial Ombudsman to review even more PPI claims.

PPI claim companies are currently one of the most common sources of internet click bait, often using misleading information to attract interest from casual browsing.

## 3. Statistics

UK banks have set up multibillion-pound provisions to compensate customers who were mis-sold PPI; Lloyds Banking Group have set aside £3.6bn,[6] HSBC have provisions of £745m,[7] and RBS have estimated they will compensate £950m.[8] Payment Protection Insurance has become the most complained about financial product ever.[9]

The content is sourced from: https://handwiki.org/wiki/Finance:Payment_protection_insurance_in_the_United_Kingdom

### References

1. Prestridge, Jeff (11 April 2009). "PPI price rise makes its critics' blood boil". The Daily Mail. http://www.dailymail.co.uk/money/article-1169286/Payment-protection-insurance-price-rise-makes-critics-blood-boil.html.
2. Tutton, Peter; Hopwood Road, Francesca (13 September 2005). "Protection racket". Citizens Advice Bureau. http://www.citizensadvice.org.uk/index/campaigns/policy_campaign_publications/evidence_reports/er_consumerandebt/protection_racket.htm. Retrieved 24 October 2013.