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Protection racket

CAB evidence on the cost and effectiveness of paymentprotection insurance

This report was written by Peter Tutton and Francesca Hopwood Road, Citizens Advice

September 2005

Contents

Introduction.....................................................................................................1
Is payment protection insurance good value for money? ..........................5
Exclusions.....................................................................................................13
The selling process ......................................................................................25
Making a claim and being paid ....................................................................32
Closing the gaps...........................................................................................41

Bibliography.............................................................................................................45

Appendix 1 the Citizens Advice production baseline................................................47

Appendix 2 comparison of Council of Mortgage Lenders and Finance and Leasing Association baselines for payment protection insurance.......................50

Appendix 3 List of Citizens Advice Bureaux that submitted evidence between January 2004 and April 2005.....................................................................................54

1. Introduction

1.1 Anyone can lose their job, fall ill or experience bereavement or the breakdown of a relationship at almost any time. A change in circumstances can lead to a dramatic and sometimes permanent fall in income. For those people with outstanding credit agreements a cut in income raises the serious possibility of unmanageable debt. None of us have perfect foresight and so credit carries an inherent risk of falling into debt.

1.2 It is not therefore surprising that a large payment protection insurance (PPI) industry has developed to help borrowers offset the credit risk they face. A DTI – led working party concluded that PPI can “provide valuable protection against changes in a consumer’s financial circumstances.¹ Industry estimates for the UK PPI market put the number of live policies at around 20 million, with between 6.5 and 7.5 million new policies being taken out each year. PPI premiums are said to total approximately £5.3 billion per year.² In comparison, property insurance premiums total £8 billion and motor insurance £9.5 billion.³

1.3 In recent years the number of claims made on policies each year has been significantly lower than the number of new policies taken out. Figures from 2002 estimate 450,000 new claims each year, around one claim for every 15 policies taken out (or seven per cent), meeting the cost of 2.5 million monthly loan instalments⁴. However, insurance industry figures show that around 85 per cent of PPI claims are approved. This relates to a period of relatively benign economic conditions when insurers have faced a period of low risk.

1.4 However, the scale and extent of PPI does not necessarily mean that PPI products provide consumers with good value for money, or that the market is working well for consumers. Most borrowers purchase PPI linked to the credit product. Borrowers enter into these secondary sales with little opportunity to shop around and no real choice. As the Financial Services Authority (FSA) has pointed out, there is a danger that secondary sales lead to customers buying products that are poor value⁵.

1.5 Stories of the credit industry making large, even excessive, profits from PPI premiums and commission regularly appear in the finance press. For instance the Guardian reported that Barclays made £240 million from PPI sales in 2000/01, with a margin of 70 per cent on payments made by consumers.⁶ Lloyds TSB plc report income in 2004 from creditor insurance premiums of £114 million and commissions from broking creditor insurance at

¹Review of the Consumer Credit Act: progress report, DTI, August 2002² Figures supplied by the Association of British Insurers, August 2005 ³UK insurance - key facts, Association of British Insurers (2004) ⁴Regulation of General Insurance – Creditor Insurance – An industry approach to consultation, ABI, BBA, BRC, CCTA, CML, FLA, Protect and Retail Motor Industry Federation, 2002 ⁵CP 160 Insurance selling and administration-the FSA’s level approach to regulation; Financial Services Authority, 2002 ⁶The Guardian, Saturday March 6 2004

£377 million.⁷ The report comments that overall general insurance broking commission had fallen reflecting lower profit sharing income from other insurance broking. However at the same time income from creditor insurance increased by £26 million. Our analysis of six fairly widely available policies suggests that borrowers could spend as much as £85 over a year to obtain only a £12 reduction in their debt in a similar period. Two different estimates suggest that PPI premiums are about three times the cost of providing cover. This implies that borrowers could be overcharged by as much as £3 billion per year for PPI cover.

1.6 CAB evidence suggests that both the sales process and design of PPI products fail to meet the needs of many CAB clients and often just increases their indebtedness. A survey of CAB debt clients in 2001 found significant limitations of PPI in resolving debt problems when they arise.⁸ In cases where our clients had PPI on their lending, the limitations of the policy held meant that clients could only make claims for just over a quarter of these debts. The most commonly cited reason (73 per cent of those not claiming) for not claiming on the policy was that there was no ability to claim, for example because the client was in debt due to a relationship breakdown. In those cases our clients had paid for insurance that did not meet their needs. Even when a claim is made, few CAB clients surveyed were successful. Claims were not successful in 85 per cent of those cases where the credit had PPI cover and a claim was made.

1.7 These figures contradict claims by the creditor insurance industry who state that 85% of PPI claims are successful.⁹ But CAB clients are more likely to be on low and sometimes unstable incomes and to experience health problems than the general UK population.¹⁰ This suggests that PPI products fail the most vulnerable in society, i.e. those who are most in need of the protection it offers.

1.8 CAB enquiry statistics show how PPI fails our client group. Table 1.1 shows that the profile of CAB client problems about payment protection insurance differs in a number of respects from that of CAB enquiries about car insurance. CAB clients enquiring about PPI problems are twice as likely to have had a claim refused as clients enquiring about motor insurance.

1.9 A case reported by one CAB shows how these problems of high cost insurance and barriers to claiming can combine to produce devastating consequences for borrowers:

A widow in receipt of pension credit sought advice from a CAB in Lincolnshire

about debts of £27,000 to seven creditors. The client had got into debt when

she moved to be nearer her adult children. The moves were expensive, so

⁷2004 results, Lloyds TSB Group plc (2005) ⁸In too deep – CAB clients’ experience of debt, Citizens Advice, 2003 ⁹ Presentation by Protect to Citizens Advice, December 2004 ¹⁰Unmet need for Citizens Advice Bureaux, MORI, 2004

Table 1.1: A comparison of CAB enquiries about PPI and vehicle insurance in first quarter of 2005 - 06

Other

Complaints and redress

Cancellation and withdrawal

Refusal of claim

Ability to obtain cover

Payment methods

Poor admin and

communication

Selling methods

Vehicle

PPI

Base: 350 enquiries about payment protection insurance and 653 enquiries about vehicle insurance made to 73 Citizens Advice Bureaux in England and Wales from 1 April to 30 June 2005.

she asked her bank for loans. The bank lent her £14,500 and insisted that she took out payment protection insurance even though she was in receipt of benefits and would not be able to claim on the insurance. This increased the debt to £16,500. The total repayments were £304 per month, leaving her only £160 per month to live on. As a result the client:

had to take on an ironing job at £10 per week to pay for food
used her credit cards to make ends meet, thus increasing her debt
could no longer afford to heat her small bungalow
had to give up her involvement with the local Women's Institute, her only social activity, because she could not afford to go on the trips they arranged, and
was worrying endlessly about all the letters she was receiving from her creditors, particularly her bank.

At the time she sought advice, the client had developed heart problems and was contemplating suicide as the only way to get out of her financial difficulties.

1.10 Unmanageable debt is not just a problem faced by individuals, but also has a wider social cost. For instance the Department of Trade and Industry estimates that the cost of output lost through the reduced productivity of overindebted individuals could be as high as one per cent of GDP.¹¹ This makes a compelling case for insurers, creditors and government to ensure that there is an accessible, affordable and effective safety net for borrowers against the risk of debt.

1.11 Citizens Advice also considers that more concerted action from the relevant market regulators is necessary. The failure of PPI points to a regulatory gap. A wide-ranging review of the role and nature of payment protection insurance in the UK consumer credit market is now essential and urgent.

About this report

1.12 This report is based on an analysis of 564 cases submitted by 269 Citizens Advice Bureaux in England, Wales and Northern Ireland for the period January 2004 to April 2005. Chapter two looks at the costs of PPI and the benefits that borrowers can expect in return. Chapter three will present evidence on the risks that seem to be commonly excluded from PPI policies. Chapter four looks at the PPI selling process and reports from CAB clients who have been sold policies that were unsuitable for their needs. Chapter five highlights problems with the administration and adjudication of claims that have prevented CAB clients from benefiting from the policy they had purchased. The final chapter argues for regulatory action to produce a better safety net for borrowers.

¹¹Fair, clear and competitive – the consumer credit market in the 21^st century, Department of Trade and Industry, 2003

2. Is PPI good value for money?

2.1 All borrowers will be interested in whether their policy will provide them with good value for money. Because people shopping for credit are offered a single choice of PPI product on a take it or leave it basis, there is no information to make a judgement on the comparative worth of their purchase. We must take it on trust that our lender will make the best choice for us.

2.2 Lenders concerned with the welfare of their customers should therefore ensure that the PPI policy they provide, either through an in-house insurer or by commercial arrangement, are effective and competitive. Borrowers should receive a level of cover that genuinely protects them against indebtedness and the policy should perform at least as well as any other product on the market against objective measures such as:

The number of benefits that the policy offers
The cash or other value of these benefits and their duration
The price borrowers must pay for cover.

2.3 If this were the case, PPI products should be fairly similar in their key attributes. Evidence presented previously showed how some PPI products give people cover against a wider range of risks than others, suggesting that not all policies provide borrowers with the same value for money.

2.4 This chapter looks at two further measures of good value, comparing the value of claims for accident, sickness and unemployment in different policies and assessing the price that borrowers pay for PPI. In this chapter, we use scenarios where the borrower has had to claim on their PPI policy for a period of at least 12 months. We have done this because many of our clients have long-term financial difficulties, which last 12 months or more.

The cost of payment protection insurance on revolving credit agreements

2.5 The policies we have seen covering credit card payments vary in the costs, level of protection and value of payments they offer. Table 2.1 below demonstrates this for with six randomly chosen credit card agreements sourced between June and August 2005.

**Table 2.1 – a comparison of the costs and benefits of PPI policies offered**
Company	Monthlybenefit	Unemployment	Initial waiting period	Subsequent payment	Cost
Barclaycard	10% balance	12 payments	14 days	Each complete 30 days	£0.79 per £100 balance pcm
Capital One	10% balance	12 payments or until credit limit	30 days	Each complete 30 days	£0.79 per £100 balance pcm
Mint	10% of balance to maximum 10% credit limit	12 payments	30 days	Each complete 30 days	£0.77 per £100 balance pcm
Lloyds TSB	5% of outstanding balance	12 payments, last to clear balance	15 days	Each complete 30 days	£0.79 per £100 balance pcm
HBOS	10% balance to maximum £2,500 per month	12 payments	30 days	Daily benefit paid monthly	£0.78 per £100 balance pcm
MBNA	3% balance to £1,200 maximum	12 payments	30 days	Each complete 30 days	£0.72 per £100 balance pcm

2.6 A number of the policies are priced at the same amount and all of them are within reasonable touching distance, with each costing less than one per cent of the value of the outstanding balance per month in each agreement. Although this does not seem to be much, this is not a particularly transparent way of stating the cost. When added together on an annual basis, a £1,000 balance throughout the year will attract an annual premium of £95 for the highest priced policy and £86 pounds for the cheapest. In APR terms, this is the equivalent of adding nine and a half per cent and eight and a half per cent respectively to the cost of borrowing (or around 0.75 and 0.7 per cent to the advertised monthly rate). Expressed in these terms, the PPI premium of these agreements seems more expensive and the difference between the most and least expensive policies more marked. For example:

A Northern Ireland CAB reported that a man off work due to ill health sought advice about £21,000 debt, which included three credit cards. The CAB was shocked to discover the cost of payment protection insurance premiums on the credit cards:

£15.50 per month on a debt of £2,152,
£24.52 per month on a debt of £3,168 and
£14.36 per month on a debt of £1,340.

This totalled nearly £50 per month on debts of £6,600, which is equivalent to an extra monthly interest charge of 0.75 per cent.

2.7 We believe that borrowers need a clear and simple method for assessing the total cost of PPI in relation to the cost of borrowing on revolving credit agreements. The usefulness of both summary boxes and scenarios was raised by the Treasury Select Committee inquiry into credit cards and a similar level of transparency should be extended to PPI connected to these credit agreements.¹²Citizens Advice recommends that the Key Facts document for PPI policies sold with revolving credit agreements should give brief scenarios of the overall costs of the policy.

2.8 Policies also differ in what they offer borrowers for their money. In PPI covering revolving credit agreements, unemployment and illness/disability benefits are expressed as a per cent of the balance outstanding on the last statement date before the claim. Once again, most of the policies pay a monthly benefit at the same rate of 10 percent of the balance. However two of the policies pay significantly lower benefits at five and three per cent respectively. On an outstanding balance of £1,000, the difference between the highest and lowest paying policies is £70 per month, a massive amount considering the price difference between policies. All of the policies offered a maximum of 12 monthly payments (unless the balance cleared first) in any single claim period; although in some policies the total amount of benefit was capped at the level of the borrower’s credit limit or some other monetary amount.

2.9 Clearly these six policies have been designed with some regard to each other and there is a standard of sorts operating in PPI for credit card agreements. However this does not appear to be enough to ensure a consistent level of benefits across policies with some borrowers offered a lower degree of protection than others. This translates directly in to the effectiveness of the policies in covering borrowers against the threat of indebtedness.

2.10 Borrowers who experience longer periods of reduced income through unemployment or incapacity for work through illness or disability will want to know whether the PPI they have bought can keep them clear of a long-term debt problem. Only Lloyds TSB’s credit card policy appears to give this commitment by clearing the balance owing on the card with the final benefit payment. All the other cards only commit to making 12 payments in a claim period, regardless of any remaining debt. Table 2.2 below provides estimates of the balance remaining (if any) after 12 benefit payments at three different payment rates and at three interest rates that reflect segments of the credit card market. A starting balance of £1,000 is assumed at the start of the claim. It is also assumed that the borrower has to continue to pay the PPI premium payments throughout the claim period. These have been added to the balance.

¹²Transparency of credit card charges, Treasury Select Committee, December 2003

**Table 2.2: Amount left on a £1,000 credit card balance after a continuous 12 month claim**
	Monthly Interest rate % (APR in brackets)13
Benefit payment rate	1.25% (16.07%)	1.5% (19.56%)	2.2% (29.84%)
10%	nil	nil	£5
5%	£601	£629	£713
3%	£862	£894	£988

2.11 As one would expect, a lower rate of benefit payments leads to a larger balance remaining at the end of the benefit period. A higher interest rate also reduces the effectiveness of benefits, leaving a residual debt for each benefit payment rate at the highest level of interest shown here. Given that higher interest rates are charged to people with a poor credit history or on low incomes, this method of calculating benefits perversely gives least protection to borrowers who need it most.

2.12 This is particularly evident in the policy paying monthly benefits at three per cent of the outstanding balance. As the Treasury Select Committee highlighted in their report on credit card transparency, many credit card companies have now reduced their minimum payment on credit card balances to 2 – 3 per cent of the outstanding balance.¹⁴ Taking into account the ongoing costs of the policy itself, a borrower may only see their indebtedness reduced by £12 in the worst scenario in table 2.2. CAB evidence shows the impact of this practice:

A CAB in Surrey reported the case of a woman in well paid employment who fell ill and had to rely on statutory sick pay. She had taken out PPI on two credit cards. The insurance would pay 10 per cent of the balance at the time the illness started but only if insurance premiums were continued for 12 months. She worked out that the balance would have to be over £950 to make claiming worthwhile. The other card had PPI costing £19 per month but only covered 3 per cent of the balance.

A CAB in Norfolk reported that a widow on income support owed a credit card company £3,140. She was paying £22.52 per month for payment protection premiums, but with interest, late payment charges and the PPI premiums, the minimum payment on her account totalled £105.53 per month. The insurance would only pay £105.20 per month off the account, so her debt was slowly increasing.

¹³ Interest calculated on a monthly rather than daily basis ¹⁴Transparency of credit card charges, Treasury Select Committee, December 2003

The cost of payment protection insurance on fixed sum credit agreements

2.13 PPI cover on fixed sum credit agreements such as secured and unsecured loans, hire purchase and conditional sale agreements is often purchased by an up front single premium that borrowers fund by taking out additional interest bearing credit that is bundled up with the payment to the main loan. The premium and interest that accrues on it can work out as a substantial proportion of the overall cost of credit as the following cases brought to bureaux show.

A CAB in Greater Manchester reported that a woman with multiple debts had taken out a consolidation loan for £20,000 to deal with them. Later the client read the documentation and realised that she had actually paid £27,000 as the loan included payment protection insurance. When the client investigated further she saw that her monthly repayments were £284pm over 300 months, which meant that she would have to pay £85,200 over the course of the agreement. By this time she had run out of time to cancel the loan.

A CAB in Cornwall was visited by a woman who had taken out a joint secured personal loan. She had separated from her partner and was struggling with the repayments. Although the client had signed the application and received a copy, she was unaware of the cost of the PPI premium that increased the loan from £17,800 to £22,962. The premium attracted interest at the same rate as the initial loan.

2.14 Bureaux evidence on the costs of PPI for fixed sum credit agreements shows how prices vary considerably both within and between sectors of the consumer credit market. This is summarised in table 2.3 below showing original loan amount, PPI premium and the premium expressed as a per cent of the amount borrowed.

**Table 2.3: PPI premiums by per cent of loan value: cases reported bybureaux¹⁵**
Loan Type	Loan amount	PPI premium	Premium as a percent of loaned value
Unsecured personal loan	£8,933	£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%

¹⁵ These examples have been taken from case studies reported to Citizens Advice by bureaux during the period January 2004 – April 2005, where the bureau was able to identify the costs of insurance and the loan. It is not clear from the HP and conditional sale agreements whether the amount identified for insurance also included insurances other than PPI.

(Debtor/creditor/ supplier)
Secured loan	£25,000	£12,127	49%
Secured loan	£35,000	£10,150	29%
Conditional sale for car	£4,300	£2,394	56%
Unsecured personal loan	£13,000	£3,367	26%

2.15 Lending for PPI policies contribute considerably to the amount owed in each of these cases, with agreements that tend to be marketed at people on lower incomes often attracting the highest PPI costs by proportion of loan size. Policies connected to hire purchase agreements seem disproportionately expensive in this evidence. It is also important to note that people taking out more than one credit agreement will face these charges more than once. Someone who buys an unsecured loan and goods on hire purchase in the first and third examples in table 2.3 would see their indebtedness of £14,000 grow by an additional £4,500 through payment protection premiums alone.

2.16 In a series of seven quotes obtained on-line for a loan of £5,000 to be repaid over 60 months the monthly loan repayment was increased by an average of £23.30 with PPI costs. As these costs eat into the income of multiple credit users, their financial vulnerability becomes greater. Paradoxically this might make PPI disproportionately attractive to people who are at greater risk of indebtedness. In these circumstances it is not clear whether PPI provides relief from indebtedness or is a factor in its cause.

2.17 As with PPI covering credit cards, there is variation in the amounts that policies pay in respect of illness, disability or unemployment. Monthly payments in respect of fixed sum loan agreements tend to cover the loan instalment amount, although some policies (particularly some mortgage protection policies) take an income protection approach in replacing a proportion of lost income or paying a set amount of benefit that is more than the loan instalment. Several policies offer cashback marketing incentives where a proportion of the premium is repaid to borrowers who reach the end of their loan term without claiming on the policy. All of the policies we have seen pay unemployment benefits for a twelve month maximum in an unbroken claim. Some policies will pay sickness/disability benefits up and until the end of the loan term if needed while others will only pay these benefits for a maximum of 12 months in one unbroken claim.

The need to make an effective price comparison

2.18 The variation in both the price and extent of cover in PPI products sold with both fixed sum and revolving credit agreements suggests that some lenders are selling better value policies than others. Borrowers with access to comparative PPI product information might be in a better position to put pressure on those lenders selling polices that are more expensive or which offer lower standards of cover. Equally, greater awareness of alternatives such as stand alone PPI, income protection policies or a suite of separate insurance products might aid people to get better protection against the risks of credit

default at a lower price. We recommend that, as a minimum, the Financial Services Authority (FSA), who regulate general insurance, establish and publicise comparative tables for PPI and alternative products insuring against credit risks.

2.19 This would be a welcome addition to the consumer information provided by the FSA encouraging those that are able to shop around to do so. A health warning in PPI marketing alerting prospective buyers that a better deal might be available elsewhere and directing their attention to FSA comparative information would be help to generate take-up.

2.20 However most people are primarily shopping around for credit rather than for insurance and it is unlikely that the price and content of PPI will have more than a marginal effect on their choice of credit product. For many borrowers better information will not alter the choice of taking the insurance offered by their lender or not being insured at all. When even mortgage payment protection insurance has a take up of only 37 per cent of new borrowers (25 per cent for all borrowers), more needs to be done, by lenders in particular, to make PPI a more attractive proposition for borrowers.¹⁶

One-off and monthly premiums

2.21 PPI premiums on credit cards are usually credited monthly to the balance. Likewise mortgage payment protection insurance is paid monthly. But PPI for fixed sum credit agreements is often paid up front as a single premium. This pushes borrowers into funding the premium by increasing the amount borrowed. This would not be necessary if borrowers could pay by monthly instalments as they go along. Lenders are squeezing extra loan business out of borrowers who are effectively being penalised for trying to minimise the risks of credit use.

2.22 Citizens Advice recommends that relevant credit industry codes of practice including the Banking Code, Finance and Leasing, Consumer Credit Trade Association codes, are amended to require lenders to offer borrower the option of paying PPI premiums on fixed sum credit agreement by monthly instalments instead of a one-off premium. In order that borrowers can exercise an informed choice, lenders should be required set out the cost of each option, including interest charged on single premiums.

2.23 This has two advantages for borrowers. Firstly if an individual is unable to keep up with payments for a reason which is not covered by the insurance, the PPI premium does not add to their indebtedness. Secondly if the borrower wants to settle the loan early, the insurance policy simply ends, rather than forming part of the early settlement rebate calculations.

¹⁶Managing risk and sustainable home ownership in the medium term: Reassessing the options, J Ford and S Wilcox, Joseph Rowntree Foundation (2005).

2.24 Given that lenders increasingly price credit products according to risk, one might expect borrowers to be offered an interest rate discount as an inducement to take out PPI as this reduces the risk of credit default rather than being charged additional interest for the benefit of the lender. However such discounts are not commonly offered. Indeed, in some cases where lenders have offered such a discount the OFT have had to intervene as the price of the (effectively compulsory) PPI had not been included in the credit cost calculation thus giving a misleading illustration of the value of the discount to borrowers¹⁷.

2.25 It would appear that the credit industry is more interested in the profitability of PPI than its effectiveness as a safety net against indebtedness. The Competition Commission Inquiry into the store card market found that sales of PPI account for between nine and 20 per cent of card providers’ total revenue. The premiums paid by consumers were typically three to four times the net rate charged by the underwriter to the card provider.¹⁸ Recent estimates for mortgage payment protection insurance suggest that the annual premium income for £100 worth of cover is nearly three times the cost of that cover to the insurer before administration charges, albeit in benign economic conditions.¹⁹. This implies that borrowers could be overcharged by as much as £3 billion per year for PPI cover.

2.26 Taken with the evidence cited above, these figures suggest that there are savings that could be passed on to borrowers if there was a more competitive PPI market, particularly as lenders capture part of the benefit of PPI in reduced bad debt provision. Therefore we recommend that the FSA establish a PPI stakeholder product with charges capped at an economic level.

Conclusions

2.27 Citizens Advice believes that our evidence and figures from other sources suggest that savings can be made on the cost of PPI which could be passed on to borrowers as an incentive for more people to insure themselves against credit risk. These savings must come from the profits that lenders are taking from PPI policies as it is their responsibility to ensure that PPI products reduce the risks of indebtedness. In the next chapter we look at the content of policies and how they could be improved.

¹⁷Discounted APRs and PPI, Office of Fair Trading, 2000 ¹⁸Store card market inquiry. Emerging thinking, Annex E, Competition Commission (2005) ¹⁹Managing risk and sustainable home ownership in the medium term: Reassessing the options, J Ford and S Wilcox (2005)

3 Exclusions

What would happen if you became unable to cover your card repayments? You can rest assured that your card repayments will be taken care of…”(HSBC card protection)
“So for just a few pence a day you could enjoy additional peace of mind, knowing that your …monthly repayments are covered, should you be unable to work…” (MBNA card cover)
“Our aim is to combine value for money with peace of mind to make insurance straightforward for you” (Bank of Scotland unsecured loan cover)
“Optional Loan Protection could cover your loan repayments if you can't work due to illness, accident or unemployment. You can only take out this valuable reassurance when you apply for your loan so remember to tell us that you want it – otherwise it’ll be too late.” (Lloyds TSB personal loans)²⁰

3.1 Lenders’ information about the PPI products they sell often opens with a marketing statement that describes the product in a way to appeal to prospective borrowers. Prominent references to “peace of mind” and “repayments taken care of” suggest a guarantee to meet the borrower’s commitments under the credit agreement should anything go wrong. Not just a product, payment protection here evokes the idea of a relationship of trust, mutual support and value between lender and borrower.

3.2 In reality, payment protection is a misnomer. Our evidence is that the protection borrowers pay for is partial, conditional and subject to exclusions, which may prevent a successful claim. It is precisely because consumers cannot plan for sudden change of circumstances that exclusion clauses so badly undermine the value of payment protection insurance. This chapter examines CAB evidence on the common exclusions in payment protection insurance policies:

Age
Bad backs
Mental health problems
Pre-existing conditions
Employment patterns
Risks which are seldom covered

Age

3.3 Upper age limits on some or all of the risks covered by the policy are a common feature in the PPI policies we have seen. For instance, some

²⁰ All the above quotes were taken from internet promotional material from these lenders during the period May – August 2005.

policies will limit cover for unemployment, illness and disability to borrowers under 65; in other policies borrowers above an age threshold such as 65 or 70 become excluded from any cover under the policy. Evidence from bureaux shows how borrowers who are affected by these age limits are still sold policies that they cannot benefit from.

A CAB in Bedfordshire reported that a client who was widowed and aged 65 had bought windows, under considerable pressure from a salesman. Included in the contract was payment protection insurance. The total value of the contract was £6,240 payable in 120 monthly instalments. Following his wife’s death, he tried to claim on the PPI but was told the cover only applied to the first person on the contract, which was him. The client then went on to read the small print and he discovered that the PPI could only be taken out by someone under the age of 60 at the time of contract. The credit provider’s agent was aware that the client was over 60 because the client had to provide details when applying for the credit agreement.

A CAB in Cambridgeshire reports the case of a woman who had been paying a PPI agreement in respect of a credit agreement for some years. The woman had had to go into hospital and attempted to make a claim. However, the woman was told that as she was 93 she was too old to be covered by the PPI. The bureau was told that the woman had made payment to the PPI of £1,200 over the years.

3.4 The age limits found in many PPI policies seem to take no account of the actual credit risks borrowers affected by these exclusions actually face. The employment rate for people over 65 in 2004 stood at 5.9 percent and 14 percent of the income of pensioner households headed by someone under 75 derived from earnings.²¹ The assumption found in many PPI policies that people over 65 (the most commonly found age threshold) do not need cover against the risk of involuntary loss of earnings is incorrect in point of fact and discriminatory in its affect. Citizens Advice believes that PPI policiesshould cover involuntary loss of earnings without age limits. As the proportion of income derived form earnings drops to two per cent for those households where the head is over 75 this would not represent an unlimited extra cost for insurers. ²²

Bad backs

3.5 Many PPI policies contain clauses that exclude claims where the consumer has lost income as a result of back problems. In some cases this exclusion is total; one policy we found excludes all cases of “backache”, other policies place a high burden of evidence on claimants that in some cases leads to seemingly unreasonable refusals of claims.

²¹Labour Market Trends, Volume 112,No 6: 20 July 2005, Office of National Statistics (2005); The Pensioners Incomes Series 2003/4, Pensions Analysis Directorate, Department for Work and Pensions (2005)²²The Pensioners Incomes Series 2003/4, Pensions Analysis Directorate, Department for Work and Pensions (2005)

A man with three credit card debts sought advice from a CAB in Wiltshire. He was unable to work because of a fractured spinal disc and had claimed on the payment protection insurance on all three of his credit cards. However the insurance company refused to accept the medical evidence supplied by the client, which included normal x-rays and hospital disability letters. The insurance company said that the only evidence they would accept was MRI scans. During the course of this dispute about acceptable evidence the client’s debt continued to mount through interest accumulating on the debt and PPI premiums continuing to be charged to his accounts.

A Worcestershire CAB saw a client who was off work with back problems. The client had put in a claim on his payment protection insurance, but the small print of the policy stated that medical evidence needed to be backed up by an x-ray. However, the client’s GP disputed that the client’s condition would actually show up on an x-ray.

3.6 It is pertinent to point out here that the Health and Safety Executive state that back pain is the leading cause of sickness absence from work.²³ A significant cause of loss of earnings is therefore excluded from PPI cover in many policies.

Mental health

3.7 Common exclusion clauses in PPI policies make claims on the basis of poor mental health either impossible or extremely limited in scope, for two reasons. Time off work due to experiencing mental health problems is excluded from some PPI policies. For instance, a personal loan cover policy sold by one high street bank states that claims resulting from ‘any psychotic or psychoneurotic illness, mental or nervous disorder or stress or stress related condition’ will be excluded. Evidence from bureaux shows the detriment that such exclusions cause CAB clients.

A client of a Hampshire CAB had bought a car on a Hire Purchase agreement that included payment protection insurance. The client had to take time off work because of stress. However stress is specifically excluded from the sickness cover in the payment protection policy.

A client of a Somerset CAB was told that he could not claim on his payment protection insurance. The client had been off work suffering from anxiety and stress; however the insurance company would not pay out on claims resulting from any mental health problems.

A CAB in Surrey advised a woman who came to them after her son had been sold a bank loan with payment protection attached. However, the client’s son was already off work due to serious mental illness and

²³Initiative Evaluation Report: Back in Work, Health and Safety Executive, 2002

claiming incapacity benefit. The policy that the bank sold him did not cover mental health problems.

3.8 As in the case of back problems, some policies allow claims in respect of mental health problems but make this conditional on fulfilling further requirements. One policy excludes mental health claims unless the claimant is under the care of and receiving treatment from a consultant psychiatrist. We explore this issue further in Chapter 5.

3.9 Given that estimates suggest between one in four and one in six people suffer from a mental health problem at any one time, and that in February 2005, 925,700 of the 2,387,000 claims for incapacity benefit were as a result of mental or behavioural disorders, another significant reason for claiming is not covered in the PPI policies sold by some large, well known, high volume lenders.²⁴

Pre-existing conditions

3.10 It is also common for policies to exclude claims made as a result of pre existing medical conditions that the claimant either knew about when the policy started or which the claimant had either shown symptoms of or received treatment for within a specified period before the policy started. This may appear to be reasonable, but often these exclusions were not brought sufficiently to the borrower’s attention at the time of sale:

A CAB in Lancashire reported that a client with four unsecured debts had had to give up work due to longstanding health problems. He had claimed on the payment protection insurance on all four debts that included payment protection insurance. One of the loans was for £8,000 with a payment protection premium added to make a total owed of £13,786.08. The company questioned the client about his medical condition, stating that this was probably the result of a long-term pre existing condition.

A Staffordshire CAB saw a client who had bought a second hand car on credit, with payment protection insurance. When he became ill with asthma and depression he made a claim. The insurance company told him that he was not covered by the policy because asthma was a preexisting condition and that his policy did not cover depression.

3.11 There are particular problems with the length of this period, which varies between policies. Typically mental health problems are subject to longer limits on pre-existence than are other physical disabilities, with the exception of back problems. For instance, the PPI policy sold by a well known credit card company specifies that claims will not be paid when the medical conditions

²⁴N Singleton, R Bumpstead, M O’Brien, A Lee and H Meltzer, Psychiatric Morbidity Among Adults Living in Private Households, 2000, (London, The Stationery Office, 2001); Incapacity Benefit and Severe Disability Allowance Quarterly summary statistics, February 2005, DWP

giving rise to the claim pre existed the claim by up to two years; this period is extended to five years in the case of mental health and back problems.

Employment

3.12 Exclusion clauses in PPI policies also affect benefits paid for income loss due to unemployment. Policies usually exclude claims arising from involuntary unemployment, unemployment following dismissal for misconduct and other circumstances where the loss of employment stems from the non – economic conduct or behaviour of the claimant. These conditions are generally reasonable and only present problems with interpretation and adjudication disputes. However, another set of exclusions apply to the self employed, people working on temporary contracts and casual workers where it can be difficult to demonstrate that unemployment is involuntary.

3.13 Typically the self-employed are not covered for reductions in income, whether protracted or temporary, unless they cease trading and wind up the business. Even if this is the case, policies will differ on the circumstances of business failure considered reasonable to attract benefit. For some policies, the trader must have ceased trading because they could not find enough work to satisfy reasonable business and living expenses. In other policies the trader has to prove that the business ceased trading because it was unable to pay its debts when they fell due. Many self-employed people will be unincorporated sole traders with personal liabilities for business debts. It seems perverse that the gateway to protection from indebtedness on personal lending should be proof of indebtedness on their business lending. For example:

A CAB in Kent reported that a client came to them concerning payment protection insurance. The client was no longer working and he made a claim on his insurance. His claim was been rejected because the insurance does not cover people who are self-employed. However, the client stated that the salesman knew this when he was sold the policy.

A CAB in Cheshire saw a client with arrears on a secured loan. The client sought to get the payment protection insurance refunded as he was self-employed and this is specifically excluded from cover under the policy.

3.14 For consumers employed on non-permanent contracts cover is also limited in a way that varies between policies. In some policies all unemployment resulting from the termination of fixed term contracts is excluded, regardless of the term of the contract. In other policies, employees on fixed term contracts are covered only where they have worked for an employer for a set period of time, usually 24 months or where the employee is under a renewed 12 month contract.

An Oxfordshire CAB saw a client who had taken out a loan with a high street bank, together with payment protection insurance to cover him in the event of redundancy. During the term of the loan, he changed his job to work for a temping agency at higher pay. He was then made redundant but the bank refused to honour his claim as temping work is listed as an exclusion.

A CAB in Warwickshire was visited by a client who had taken out a loan for £5,000 together with PPI costing an extra £500 to cover him in case he was made redundant. As part of the loan application process the client had to send in his contract of employment, which clearly stated that he was a casual worker. He subsequently had to make a claim on the PPI policy but was told by the insurance company that he was not entitled to benefit, as the policy does not cover casual workers. The lender did not point this out when the policy and the loan it supported were sold.

3.15 People in self-employment make up 12 per cent, or one in eight, of the UK labour force and people in temporary employment about 6 per cent, with just under half of these on fixed term contracts.²⁵ This represents another large section of the credit default risk that is not effectively covered by PPI.

3.16 We believe that PPI policies should do much more to protect the self-employed and those who are employed on non-permanent contracts. Insurers are entitled to reasonably protect themselves against unreasonable claims. However, the breadth and nature of PPI exclusion clauses seem to go beyond what is reasonable. The effect is that many extant policies fail to provide adequate protection against genuine financial hardship and in some cases actually provoke indebtedness. While no one would deny that assessing claims from self employed and non-permanent contract workers presents difficult questions of evidence, cause and classification, we would be surprised if a fair system of adjudication could not be established by an industry suitably motivated to do so.

Risks that seldom get covered

3.17 Borrowers also face common risks to the level of their income that are completely outside the cover offered by most policies. Relationship breakdown and having to give up work to care for a sick or elderly relative are commonly not covered by PPI policies:

A Buckinghamshire CAB saw a client who took out a cash loan with a high street bank. The client was paying for insurance as part of the repayment plan. When she tried to claim that she had lost her job she was informed that she was not eligible, as she had lost her job not through her own health but because she had had to look after her son who has severe asthma.

3.18 It has been estimated that there is a 6.6 per cent chance of an adult in the UK becoming a carer, with one survey finding that six out of ten carers had given

²⁵Labour Force Survey Quarterly Supplement April 2005, Office of National Statistics

up employment in order to provide care.²⁶ However of the policies cited above only those offered by Bank of Scotland and MBNA cover carers. The fact that more than one policy can offer this cover suggests that it is not an uninsurable risk, merely one that PPI seems to disregard.

3.19 Relationship breakdown was cited as a contributing factor to indebtedness by 20 per cent of CAB debt clients who responded to a survey question on the reasons for their debt problems.²⁷ However none of the polices cited above included an element for relationship breakdown. This is generally regarded as an uninsurable event as its occurrence depends heavily on a decision of the insured. However we have seen one policy that provided cover for martial breakdown, but only one. This suggests that insuring for relationship breakdown might be difficult but may not be impossible.

3.20 In the same survey, around 9 per cent of CAB clients reported that a drop in income contributed to their debt problem. PPI polices do not tend to cover temporary reductions of income unless they are caused by a major event such as job loss. Although a reduction in work hours is a potential cause of credit default, borrowers are currently unable to find insurance against it in any of the PPI polices we have seen.

3.21 Some PPI policies also exclude certain borrowers because cover is restricted to the first named account holder, even though it is common for couples to take out credit in joint names. As the risks of losing income may not differ between borrowers the effectiveness of PPI as a safety net is undermined.

A Lincolnshire CAB reported that a man sought advice about the payment protection insurance on a hire purchase agreement to buy a car. At the time of sale, he and his wife were expressly told that they were both covered if they were ill, unemployed or died. When the client started to read the small print of the agreement, he was told it was unnecessary, as all the clauses had been thoroughly explained. The client subsequently became ill and as he was self-employed his business was no longer viable. In addition his wife had also become unemployed. The creditor had turned down a claim on the PPI policy, as the client was not the first person named on the agreement.

A Wiltshire CAB reported that a couple had taken out a joint loan of £15,000, plus £3,000 for payment protection insurance. His wife subsequently discovered she had cancer and had to stop work. When the couple tried to claim they were told that only the first named person was eligible. They did find this in the small print but they were not advised of it at the time.

3.22 Lenders know full well that anyone who enters into a joint credit agreement is liable to repay in full. Lenders also know that joint borrowers will often rely on

²⁶The risk of informal care: an incidence study, M Hirst, Social Policy Research Unit, University of York (1999); Redressing the balance: inclusion, competitiveness and choice, M Howard, Carers UK (2002) ²⁷In too deep, CAB clients’ experience of debt: Citizens Advice 2003

a joint pooled income to meet credit repayments. It is therefore difficult to see how PPI policies with first named account holder clauses can possibly meet the needs of joint borrowers.

3.23 It is clear that by excluding some important credit risks and omitting other risks completely PPI does not provide borrowers with the peace of mind and reassurance that the promotional materials promise. We believe that people should be able to expect a better deal.

The case for a fair baseline

3.24 Treating all mental health problems, or back problems or the entire experience of the self employed as undifferentiated and uninsurable exclusions might simplify the process of adjudication and reduce the average transaction cost of claims. But this does nothing to reduce the individual and social costs of indebtedness suffered by the considerable proportion of consumers excluded from cover. A central criticism of PPI can be found in the seeming indifference to the welfare of its consumers in the commercial rigidity of many policies. It seems as if the effort needed to prove the validity or involuntary nature of these credit risks is just too much for the policy designers to be bothered with. Due to the common nature of these life events we would argue that every policy that contains the exclusion clauses outlined above is unsuitable for the needs of significant numbers of consumers. Every sale of such a policy is arguably a mis-sale.

3.25 This is not to damn all PPI policies out of hand. Variations in the range and extent of exclusion clauses are illustrated in a comparison of the PPI policies sold by a random cross section of lenders.

3.26 Lenders can, if they choose to do so, commission and sell better and fairer PPI products. However Citizens Advice questions whether it is appropriate and in the consumers’ best interest to leave this choice to individual lenders. The practice of product bundling means that consumers generally buy a PPI policy tied to the credit product they have chosen and have no real opportunity to shop around for credit insurance to go with it. A guarantee of fair and responsible standards of cover across the credit industry as a whole would require a commitment from the industry to coordinated action.

3.27 There is nothing new or radical about this; the Council of Mortgage Lenders (CML) introduced a baseline cover specification in 1999 setting out the minimum standards of cover in mortgage payment protection polices sold by mortgage lenders. The Finance and Leasing Association (FLA) also have produced a baseline creditor product for PPI policies sold by its consumer finance members.²⁸ In principle, a baseline product developed through self-regulatory means could be beneficial to consumers. But the current trade association initiatives do not provide consumers with sufficient guarantees.

²⁸ See Appendix 2 for a comparison of the CML and FLA baseline products

Company	Bad backs	Mental health	Self employed	Fixed termcontract	Pre-existingconditions	Age
Barclay-card	Not excluded	Not excluded	Only if business wound up	Depends oncontract length	Two years, unless claim for bad backor mental healthwhere the period isfive years.	Up to 65 foraccident,sickness or unemploymentclaims but up to 70 forhospitalisation
Citi Bankcredit card	Not excluded	Not excluded	Bankruptcy, liquidationor official termination of self employed statusdue to failure of business	Depends oncontract length	12 months	Up to 65
CapitalOne	Excluded	Only forpsychosis	Only if business has failed	Excluded	12 months	People aged 65or over or whohave retired are only covered for accidents oraccidental death
Mint	Only if MRIscan showsabnormality	Not excluded	Only if business has failed	Depends oncontract length	12 months	Up to 65

Company	Bad backs	Mental health	Self employed	Fixed termcontract	Pre-existingconditions	Age
Bank ofScotlandunsecuredloan	Benefit paid for reduced period	Excluded	Excluded	Depends oncontract length	12 months	Up to 65
LloydsTSB creditcard	Not excluded	Not excluded	If business has involuntarily ceasedtrading	Depends oncontract length	12 months	Up to 65 for ASU,65-75 forhospitalisationbenefit
HSBCpersonalloan	Not excluded	Not excluded	If business has involuntarily ceasedtrading	Depends oncontract length. If contract ends early may payuntil end ofcontract	12 months	Up to 65
MBNAcard	Only ifradiological evidence	Only ifreceivingtreatment fromconsultant	If business has ceased to trade due to inability to pay debts when due	Depends oncontract length	Excluded	Up to 65 for ASUclaims but up to 70 forhospitalisation

3.28 Firstly, the two baselines set different standards in relation to risks that are covered and excluded. The CML baseline includes mental health and back problems subject to evidential requirements while the FLA baseline recommends total exclusion. Given the practice of product bundling, it does not seem reasonable that consumers should receive a lower standard of protection as a result of their credit choice; particularly as both these trade associations have members who sell secured loans.

3.29 Secondly, in some respects, these baselines are set at a very low standard, which just rubber stamps poor practice. Neither of these baselines provide an adequate response to the problems faced by self-employed and contract workers. Yet members of both trade associations will lend to people in these circumstances and sell them PPI cover.

3.30 Thirdly, these two baselines only represent certain sections of the credit industry. The Banking Code, which covers virtually all the main banks, building societies and credit card companies, is completely silent on the question of common standards for PPI. We believe that the consumer credit industry as a whole should give a commitment to produce a PPI baseline standard offering consumers a genuine and comprehensive safety net against all the risks on which lenders are willing to lend. This is not to say that there are no limits to the risks that should be underwritten, only that no common credit risk should be excluded for commercial reasons alone. Shouldering some of the costs of credit risk is surely an important part of responsible lending.

3.31 Finally the baselines are subject to voluntary, rather than statutory regulation. There are few incentives to comply. Although some trade association codes of practice are subject to effective compliance monitoring, others are not. For a baseline to be effective, it needs to be backed up by regular compliance monitoring, ideally by a regulator with effective powers to tackle bad practice.

3.32 Citizens Advice recommends that the Financial Services Authority, the regulator for general insurance, should develop a common insurance baseline product setting out acceptable standards of content for payment protection insurance agreements covering all sectors of the consumer credit market. The FSA should take this baseline into its system of rules for the conduct of insurance business. We set out our own fair baseline product in Appendix One.

3.33 The FSA is already concerned with standards for product content through the emerging treating customers fairly initiative that requires firms to develop and market products based on the ‘likely needs and financial capabilities of each group of customers’²⁹. If this is true for long term savings products it should also be true for PPI products given their high potential for widespread consumer detriment. As is the case with treating customers fairly this should not restrict competition or innovation; it simply means that a fair and effective standard of cover will be an enforceable minimum standard. However market

²⁹Treating Customers Fairly – progress and next steps: Financial Services Authority 2004

conditions can change and to be an effective product PPI also has to be both responsive to changes in customers’ needs and, of course, commercially viable. The impact of a regulated baseline product should be capable of amendment and updating on a regular basis. Citizens Advice recommends that a product baseline regulated by the FSA should be reviewed through consultation on a regular basis, and that statistical data on health problems, employment and family breakdown, as well as data on refused payment protection insurance claims, are fully considered in assessing the need to amend the baseline.

3.34 We believe it is important that this product baseline should be drawn up with the primary intention of providing borrowers with an effective safety net. Citizens Advice considers that the FSA must take into account a proper assessment of credit risks and only excluding from cover any risk where this can be clearly justified as uninsurable. Such an assessment should certainly avoid treating life events as broad undifferentiated categories. Excluding all claims on the basis of employment status or type of disability is unacceptable. Indeed we note that a large number of policies do not make such exclusions, suggesting that a policy that does cannot be treating its customers fairly. Citizens Advice believes that blanket exclusions from cover are incompatible with treating customers fairly and should be prohibited in a regulated baseline product.

Conclusion

3.35 Evidence of the experience of CAB clients shows that, far from delivering peace of mind, in too many cases PPI lets borrowers down at exactly the point where they need help most. As a safety net, there are simply too many holes and not enough net. We are not arguing that PPI should deal with all the risks that can lead a borrower to debt – there is a separate role for both the lending industry and government here - but we believe that lenders and insurers can do a much better job of covering the risks of debt that can best be covered by an insurance product. Consumers would benefit from a fair baseline product, regulated by the Financial Services Authority, which would set out minimum standards for all payment protection insurance policies. A result could be a reduction in the number of mis-sales, which is the subject of our next chapter.

4. The selling process

4.1 This chapter examines CAB evidence on the sale of payment protection insurance. The concern of this report is with PPI policies by lenders to cover borrowers against the risk of defaulting on repayments on a specific credit agreement purchased from the lender. Although separate agreements, the two products are linked by purpose and generally sold together in common marketing and application information. At the point of application consumers might be given a complete copy of the policy terms and conditions, but more typically will receive a key facts policy summary that must comply with FSA rules as to form and content³⁰. The key facts summary must set out the main features of the summary including any significant exclusion from cover.

4.2 However, our evidence shows that many people are buying, or rather being sold, PPI products that are objectively unsuitable for their needs as their circumstances exclude them from cover at the time of sale. Other CAB clients report being charged for insurance they did not ask for, did not need or did not actually get. In other cases, high pressure sales practices have been used to sell inappropriate insurance to vulnerable consumers. Reports of mis-selling problems are regular and relate to nearly all sectors of the consumer credit market from non-status mortgage lenders and hire purchase companies to major high street banks and credit card companies. The range of this evidence suggests widespread failures of consumer protection in both the PPI selling process itself and in the wider regulation of PPI sales.

4.3 This chapter will look at inappropriate sales of payment protection insurance linked to irresponsible lending, in particular lending to consolidate existing indebtedness.

Irresponsible lending

4.4 CAB evidence is that the mis-selling of PPI policies is closely connected to irresponsible lending practices. Evidence of such practices is particularly worrying in cases where a vulnerable person is especially reliant on the lender to look out for their best interests.

A CAB in Surrey reported that a client had been sold a loan protection plan although he had long-term mental health problems. The total to pay on the loan agreement was £8,930 including an additional £2,200 to pay as a single premium for the PPI. At the time of signing the agreement the client was very unwell and was not aware of what he was signing. The bank was aware of the client’s situation and that the client might not be eligible for the insurance protection policy.

A CAB in Surrey was visited by a woman who took out a loan at a high street bank along with a PPI policy. She gave the branch staff full details of her mental health problems including frequency of

³⁰ See the FSA handbook, particularly Insurance Conduct of Business, Chapter 5.5 for the form and content of key facts statements.

hospitalisation, being prevented from working for six years and income details showing receipt of income support and disability living allowance. She was told that none of this would affect claims on the PPI policy. The client had to go into hospital and her income dropped because of technicalities in the benefit system. Her PPI claim was turned down on grounds of her pre existing medical condition.

A CAB in Staffordshire reported the case of a client who had taken out a loan with a high street bank of £19,000 with a loan protection premium of £3,500. However at the time of the sale the client was in receipt of income support and was registered blind. The CAB argued that as the client was unable to claim against the insurance (not in work with a pre-existing disability before insurance purchased) he should have received a refund of the premium. The bank responded that although the branch staff were aware that the client was registered blind, the fact that he had some sight and did not use a cane or a guide dog meant that the loan protection policies were sold in good faith.

4.5 When consumers are plainly unaware or misled as to the full facts about a credit relationship it is arguable that lending decisions are not just irresponsible but predatory as well. The predatory sales process goes beyond mere complacency towards the wellbeing of credit consumers by exploiting the unequal distribution of power that can exist between the parties to a credit arrangement. One group of consumers particularly vulnerable to this are people in financial difficulties who approach their creditors for help in solving their financial difficulties. As it is the nature of the credit industry to grant loans, lenders often respond to such a request for help by offering further financial products, with further loans to reschedule or consolidate existing problem debts a particularly important example.

4.6 In many, perhaps even most, cases, consolidation loans are offered with the best of intentions as an option that can offer real benefits to indebted consumers. However bureaux continue to report a number of cases where consolidation loans have been sold to consumers who will struggle to make repayments on even this rescheduled debt from the outset. In such cases PPI policies are often sold with the loan, at significant extra cost and no benefit whatsoever to the borrower.

A man sought advice from a Devon CAB after he took out a loan to consolidate credit card debts and an overdraft. The client was persuaded to take out optional payment protection because he was told that otherwise the loan would not have been approved. The original loan was £14,575. With interest of £10,660, and the payment protection insurance premium of £7,700, the client ended up owing over £32,000.

A Dorset CAB reported that a client came to see them after he had fallen into debt. His bank had advised him to consolidate his indebtedness into one loan over a 10 year period, even though he was not working at the time due to an injury. The loan was for £16,200, with interest of £16,260 and a payment protection insurance premium of £4,918, bringing the total to £37,378.

4.7 The fact that vulnerable and sometimes desperate consumers can be persuaded to purchase loan and PPI products that are clearly detrimental to their welfare seems to raise serious questions for the regulation of sales practices. The main focus of this regulation has been in helping consumers to make informed choices through the provision of prescribed information statements at important moments in the sales process. While we welcome the FSA rules requiring borrowers to be given the key facts about a PPI policy they are invited to take out; the experience of some consumers shows that information alone, even where it is freed from the problems of understanding and representation described above, cannot prevent all aspects of mis-selling.

Pressure sales

4.8 Further evidence from bureaux casework shows the important role of sharp practice in the problems CAB clients report with PPI. In these cases, consumers who possess a reasonable degree of information and understanding still find that they are being ripped off through the deliberate actions of sales staff applying the hard sell or simply ignoring consumers’ wishes. Bureau evidence shows how CAB clients have been pushed, pressured and mislead in face to face sales

A CAB in Wiltshire saw a client who had taken out a loan and specifically stated that he did not want insurance. He received verbal confirmation from the lender that insurance would not be included with the agreement. However, insurance was included and the client paid an additional £100 per month for over a year before the problem was resolved.

A CAB in Worcestershire advised a couple with health problems in receipt of income support who were sent pre-approved applications for a credit card from with a credit limit of £600. They accepted the card but were then pestered to take out insurance despite repeatedly saying that neither of them were in work. The credit card provider said that it would provide cover in the event that the cardholder did get a job.

4.9 CAB clients also report problems where they have taken out credit by post, internet or telephone, or via a retailer, where payments for PPI policies that they have not asked for appear, as if by magic, on their bill. In these cases, the PPI policy tends to be connected to credit and storecards or catalogues, with the premium price fairly low to reflect low credit balances. However, the payments to these ghost sales of PPI policies can add up to a bigger debt problem over time.

A Gloucestershire CAB reported the case of a client whose daughter had bought goods on credit over the internet. She was charged for a PPI policy even though she had not asked for it. She informed the company that she did not want the insurance, paying for all the goods but not the payment protection. The creditor billed her each month for the payment protection plus an extra £20 per month administration charge for non-payment. The original PPI charge was £2.66 per month.

A CAB in West Yorkshire reported that an elderly client came to them after she had been charged payment protection on her catalogue for many years. She told the CAB that she had been unaware that she had been paying this until she came to settle her account and it was pointed out to her. The client had never asked for it or signed anything to agree to pay for it.

4.10 A further case involving a second hand car bought with a credit agreement illustrates how sharp practice in the sale of PPI policies and bad practice in arrears management can combine to produce worst-case outcomes for borrowers with a debt problem.

Clients who visited a CAB in County Durham had entered into a conditional sale agreement for a car. The car cost £4,700, increasing to £6,660 with the addition of interest. A PPI premium totalling £2,970 was also added, although this was neither requested nor wanted by the clients. PPI was not discussed and no price had been quoted. Despite the insurance, the clients fell into arrears and the car was repossessed leaving an outstanding balance of £5,200. The creditor immediately assigned this to a debt collector who started bankruptcy proceedings and refused to negotiate repayments. The bureau had been trying to get a copy of the PPI policy to scrutinize it further and after the involvement of Trading Standards, two pages of small print duly arrived from the insurer. Despite being referred to two further insurance companies, no insurer had any knowledge of the clients’ policy. It seems that no effective PPI policy was ever taken out, despite the clients being charged £2,970.

4.11 This illustrates how bad practice is seldom found in isolation and will lead to further bad practice if given the room to take hold and develop. It was argued at the beginning of this chapter that the nature of the PPI selling process makes it particularly prone to mis-selling problems and the many cases presented above demonstrate the forms these problems can take. However, this evidence also suggests a failure of the regulatory framework to properly consider why consumers are sold inappropriate PPI policies and how these could be prevented in future. Addressing these questions should be a priority for lenders, insurers and regulators.

How selling practices could be improved

4.12 Insurance intermediaries making a personal recommendation about an insurance product are required by FSA rules to assess the suitability of the product as against the consumer’s demands and needs. This takes into account factors such as the level of cover compared to the risks the consumer wishes to insure against, the cost of the policy and any exclusion.³¹ However, sales of PPI by lenders are classed as non-advised sales and information provided by the lender will often start by stating that they are making no personal recommendation. In this case the assessment of demands and needs means no more than printing a statement that the product meets the demands and needs of those who wish to make sure their monthly repayments will be covered in the event of illness, involuntary unemployment and so on.

4.13 However, lenders market the benefits of PPI in no uncertain terms and evidence presented above shows how policies can be very aggressively sold. Providing a key facts document, while useful, is not a sufficient safeguard. As the FSA itself points out, “markets for financial services are characterised by an imbalance of information and understanding between financial services firms and their customers”.³² Lenders will often include the key facts information in the credit application bundle and it is often reproduced in very small print. Key facts policy summaries may only detail significant exclusions, and usually contain a statement along the lines of “Other exclusions and limitations apply to this policy – see the policy document for details”. However the full policy document is usually not made available to the consumer until after they have signed the agreement to buy the policy. It is therefore not difficult to imagine how this protection could be undone by an aggressive and determined sales pitch as evidence presented above shows. Lenders must be required to do more to ensure that borrowers receive products that are suitable for their needs. If this results in a lack of competition lenders will have little incentive to invest in the staff training and resources necessary to ensure consumers are equipped with sufficient information and capacity to properly assess the merits of a PPI policy they are offered.

4.14 Citizens Advice therefore recommends that the FSA revise the requirements for key facts policy summaries for payment protection insurance so that all exclusions from cover are clearly stated.

4.15 Borrowers also do not receive any information about alternatives to PPI such as other stand alone income protection insurance or even doing nothing if no suitable product is available. It is notable that PPI marketing tends to sell the benefits of abstract reassurance in general rather than the benefits of that particular product against any other. This is arguably the result of a sales process that has the consumer as a semi-captive audience once they have made a choice of credit product. The ancillary PPI agreement is sold as a secondary consideration.

4.16 Premiums and commissions from PPI sales provide a lucrative second revenue stream for lenders. Borrowers do not always have a sufficient level of financial literacy or capability to question the merits and cost of payment protection insurance. In these circumstances they can only trust that lenders are not acting against their interests. However, the experience of CAB clients

³¹Financial Sevices Authority Handbook, Insurance Conduct of Business, section 4.3 ³²Treating Customers Fairly – progress and next steps, Financial Services Authority (2004)

suggests that this is not always the case. Whether this is the result of staff performance incentives that place a higher value on the volume of product sales than on the wellbeing of customers is unclear from the evidence. What is clear is that many clients are being poorly advised or simply ripped off in PPI sales to their considerable detriment.

4.17 Citizens Advice believes that the FSA should review the regulation of PPI sales to ensure that no borrower is sold a policy that excludes them from cover on the basis of their circumstances at the time of sale. Because of the way PPI polices are sold, lenders should be placed under a duty to assess the suitability of PPI products. The current no personal recommendation regime underestimates the role lenders play in PPI sales and the complexity of PPI products.

4.18 In particular, we recommend that lenders should be required to provide borrowers with a clear and simple questionnaire containing a full list of circumstances that might make the policy unsuitable. A sale should not be concluded until the borrowers have completed this questionnaire, and then assessed by the insurer or by the lender on their behalf and this assessment is communicated to the borrower for their records.

4.19 The intention of this recommendation is to place a clear duty on both sales staff and the sales process to actively assess the suitability of the products they are selling. However this will only act as a safeguard if borrowers can be sure that this disclosure guarantees the protection they believe they have purchased.

4.20 Citizens Advice therefore believes that lenders should be required to honour the cover that a mis-sold PPI policy would have provided had the borrower not been excluded by circumstances referenced in the suitability questionnaire, or where no questionnaire was completed by a borrower before the sale was concluded. This commitment should be incorporated into relevant credit industry trade association codes of conduct, including the Banking Code, the Finance and Leasing Association code and the Mail Order Trade Association Code. Giving consumers protection with a guaranteed outcome would seem preferable to offering redress for bad practice that depends wholly on consumers’ capacity to complain.

4.21 The problems we have highlighted relate to lenders as much as insurers, if not more so. It is lenders who select the policy they will market to their borrowers and PPI is often sold by a lender’s in-house insurer. Therefore the content and sale of the policies is an appropriate subject for consumer credit regulation. Evidence from CAB suggests that while PPI mis-selling is widespread there is a concentration of deliberate bad sales practices in certain credit sectors. Citizens Advice believes that the OFT should develop guidance on the sale and content of PPI products that would be consistent with fitness to hold a consumer credit licence.

4.22 Amendments to the Consumer Credit Agreement regulations that came into force at the end of May this year introduce some additional safeguards for borrowers who buy PPI with their credit agreement, most notably a form of consent that must be signed by the debtor in some cases³³. While this is welcome, evidence from bureaux suggests that this reform might have a limited impact at preventing high pressure sales. A warning in a signature box is no substitute for clear guidance and active compliance monitoring by firms themselves and the regulator

Conclusion

4.23 CAB evidence shows that borrowers are often sold payment protection policies which are completely inappropriate for their needs. In many cases, high pressure selling or unfair practices such as inertia selling has forced people to take out insurance which they cannot afford, do not want or need. This evidence suggests a failure of the part of regulators to address these issues. We consider that action is needed to ensure that lenders assess the suitability of PPI products for all potential customers before concluding a sale.

4.24 In the next chapter we look at CAB evidence in relation to problems people experience in trying to make a claim on their payment protection insurance

³³ The Consumer Credit (Agreements) (Amendments) Regulations 2004 amend the Consumer Credit (Agreement) Regulations 1983

5. Making a claim and being paid

5.1 Problems with insurance policies will not become apparent until the time comes to make a claim. It may only be at this point that consumers become fully aware of the implications of exclusion clauses or come to understand other limitations on their cover. People going through a major life event or personal trauma can find the administrative requirements of claiming intrusive, frustrating, obstructive and might also dispute the basis and outcome of decisions on their claims. In view of the problems CAB clients report with the content and sales of PPI, evidence of problems with administration and adjudication of PPI claims is also no surprise. This chapter examines CAB evidence on:

Medical evidence
Proof of unemployment
Administration problems

Medical evidence

5.2 Borrowers have found it difficult to make a successful claim on their payment protection insurance due to requirements to provide medical evidence on their circumstances. One example of this relates to the common PPI term allowing claims on the basis of mental illness only where the borrower can provide a consultant’s report. However 90 per cent of people experiencing mental health problems will be treated by their GP rather than a consultant.³⁴ This evidence requirement has caused problems for a number of CAB clients.

A client of a CAB in Warwickshire had taken out a bank loan together with a PPI policy for four years cover that was paid in full. He later became ill with depression and was signed off work by his GP. He made a claim on his PPI policy but the insurer did not accept this, as the client did not have a consultant psychiatrist’s report. The loan defaulted and the PPI proved useless.

A Berkshire CAB saw a client who was suffering from severe depression and was unable to work. The client had a variety of debts including defaults on car hire purchase agreement. When he attempted to claim on the insurance policy, he was told that a letter from his GP was insufficient. Instead, he had to have a letter from a consultant in case of mental illness. The consultant’s report was now ready, but the client had been asked to pay a sizeable fee before the report was released.

A Gloucestershire CAB saw a client who was off work with depression. Although she had payment protection insurance on both her credit card and on a loan, she was told that she was unable to make a successful claim unless she could prove a consultant psychiatrist was treating her.

³⁴Fast Forwarding Primary Care Mental Health, 2001, Department of Health

However, the client was actually receiving care from both a community psychiatric nurse and a psychotherapist.

5.3 Insurers are entitled to require medical evidence in support of claims from borrowers who have had to give up work due to illness or disability; but these requirements should not be so onerous as to jeopardise the borrower’s ability to ever make a claim. For some CAB clients the costs of obtaining medical evidence are also a considerable barrier to claiming:

A man sought advice from a CAB in Norfolk about a number of debts. At the time he was off work with a back injury. One of the client’s debts with a catalogue company was covered by PPI. However the insurer insisted that the client produced a sick note every month. The sick note cost the client £15 each time, and the catalogue company was not prepared to pay the fee.

A CAB in Northamptonshire reported the case of a client who was currently claiming income support. He had three credit card debts, all of which were covered by payment protection insurance. However, the insurance company would only pay out on the claim if the client supplied a medical certificate, for which the client’s GP charged £25. As the client was on income support he was unable to afford this charge.

A client of a CAB in Warwickshire was off work due to a long-term mental illness. His only income was statutory sick pay and so he made a claim on the insurance policy taken out with his car loan company. The insurer was happy to meet the £250 per month loan instalments but only as long as the client paid for a private doctor’s letter at the cost of £25 per month. The insurer would not accept the sick note supplied free by his GP and accepted by his employer.

5.4 It is not reasonable for a borrower whose income has reduced through no fault of their own to be threatened with indebtedness by having to pay charges for medical evidence to make a claim on a payment protection policy. Indeed, we welcome the commitment in the CML baseline product to the principle that the insurer should meet the costs of obtaining any medical evidence that the borrower is required to produce. Many PPI policies do clearly state that the insurer will meet the cost of any medical report or examination that it requires. Citizens Advice welcome this commitment and believe it should be incorporated into all PPI policies.

5.5 It is not immediately clear from policy wording if this commitment extends to the costs of providing medical evidence from a GP or consultant who might charge the borrower for any letter or report. Evidence from bureaux show that such charges are widespread because GPs do not consider that these reports form part of their NHS contract. Where insurers require initial orcontinuing medical evidence reports from a GP as a requirement of the claims process then the insurer should meet any charge that the GP might make.

5.6 The evidence from bureaux also suggests that these claims should be few and far between. In the majority of claims arising from illness or disability, a GP’s standard sick note should be regarded as sufficient evidence as it is for both employers and the Department of Work and Pensions³⁵. Unless there are exceptional reasons, further requests for evidence appear to be deliberate barriers to borrowers claiming on the policy.

5.7 Policy wording that requires borrowers to seek evidence from or to be under the treatment of a consultant or other specified specialist medical practitioner acts as an arbitrary barrier to consumers trying to claim on them. Although further and additional evidence might sometimes be necessary, insurers should justify the need for such evidence in each case rather than relying on a standard clause. Citizens Advice considers that the FSA should develop clear guidelines which set out when it is reasonable to request such additional evidence and when it would be unfair.

5.8 This would also help with the unreasonable delay in the assessment of medical evidence experienced by one CAB client:

A CAB in Berkshire reports the case of a client who took out a loan and paid for PPI. She had a serious car accident and being unable to work made a claim of the policy. Initially she was refused but later allowed to reapply, which she did. She repeatedly rang to check on the progress of her claim as she was by now experiencing severe financial difficulties. The bureaux then rang the lender’s in-house insurance on the client’s behalf to be told that her claim had been with the underwriters for medical investigation for two months with no action being taken.

5.9 It is also noteworthy that unreasonable requirements to provide medical evidence in support of a claim are a barrier to people claiming as a result of mental health problems. We believe that such practices are a form of discrimination in the way they single out mental health problems in a way that is unrelated to actuarial risk. The Disability Discrimination Act 2005 removed the requirement that a mental illness has to be clinically recognised for the person experiencing it to benefit from the protection of the 1995 Act it amends. Evidence from bureaux suggests that many of the people most affected by these evidence requirements should now be covered by disability discrimination law. Citizens Advice therefore recommends that the Disability Rights Commission amends its guidance in respect of Regulation 2(4) of the Disability Discrimination (Services and Premises) Regulations 1996 to clarify that circumstances in which less favourable treatment is justified should not extend to claim procedures or to conditions of cover that relate to the nature of medical care rather than the effect of the mental illness itself.

³⁵ For the first 26 weeks of a claim period, for people unable to carry out their own occupation, incapacity for work is evidence by a GP’s certificate or evidence from another registered medical practitioner (such as an osteopath) where this is reasonable. See Decision Makers Guide, paragraph 13160, Chapter 13, Volume 3, Department of Work and Pensions

Consistency of approach

5.10 CAB clients also report problems with claiming benefits for unemployment. In many PPI policies, receipt of unemployment benefits is dependent upon registering for work with the Department for Work and Pensions and receiving jobseeker’s allowance. Some policies we have seen seem to recognise that there are a number of circumstances in which people can be unemployed, actively seeking work but not entitled to receive jobseeker’s allowance. In these circumstances, policies provide for payment of benefit if the borrower can furnish alternative proof of their unemployment and actively seeking work. Despite this. CAB clients who have become unemployed without receiving jobseeker’s allowance have still been told that they cannot receive unemployment cover from their PPI:

A CAB in Lincolnshire reported that a client came to them about her debts. She was working 16 hours per week when she took out loans for £6,500 and £2,600. She was also sold PPI policies at an additional cost of £2,727. The salesperson was aware that she worked part-time but insisted that the insurance was compulsory. The client was subsequently made redundant and made a claim on her insurance. However she was not eligible for income-based jobseekers allowance because her husband was in full time employment.

A Devon CAB reported that a client had come to see them who had successfully been claiming on his payment protection insurance. He had been in receipt of JSA and able to provide the insurers with a Jobseekers Agreement. When he reached his sixtieth birthday, the Jobcentre told him he no longer needed to sign on for jobseekers allowance, as he was now eligible for pension credit. The client therefore lost his eligibility for insurance protection payments.

5.11 Problems of understanding and meaning are not made any easier by the way that PPI is tied to a particular credit agreement. Someone with more than one credit agreement might be covered by several policies sold by the same or different lenders. The opportunity for confusion if similar terms mean different things in different agreements is clear. While the development of the consistency of interpretations by the Association of British Insurers (ABI) gives some assistance here, CAB clients still seem to be getting turned away by insurers even when their claims are valid under the terms of the policy.³⁶

A CAB in County Durham assisted a man who had taken out a MPPI policy that included redundancy cover. The premium payments were up to date when he was made redundant. He had phoned the insurance provider for a claim form only to be told that he did not meet the conditions for a claim. The CAB phoned the insurer on the client’s behalf to complain and was told that he did meet the conditions after all.

³⁶ The Adviser magazine, issue 97, Raising the Game, 2002

A CAB in Berkshire advised a woman who had borrowed £3,000 to help her niece who was in financial difficulties. The lender also sold her a PPI policy even though she was over 65 and ineligible for some of its major benefits. She had been working part time but had to give this up due to back trouble. When she tried to claim of the policy she was told that she was ineligible as her back problems were pre-existing. She told the bureaux that she last had back problems twenty years ago. The lender is now threatened her with court proceedings.

5.12 In other cases, claims adjudicators have refused claims on the basis of their own interpretation of events despite contrary decisions or evidence from a more competent adjudicating authority. This causes hardship to individuals and has wider implications where decisions also undermine statutory rights elsewhere.

A CAB in Northern Ireland reports the case of a woman who had a MPPI policy that included an own occupation illness clause. She developed a serious medical problem and was unable to work in her own occupation. The insurer refused to pay out on the basis that she could still be found fit to return to her own occupation even though both her GP and employer said that she would not.

A CAB in London reported the case of a man with PPI on a credit card. The credit card insurer was refusing to pay out on a claim arising from unemployment. The client had previously been dismissed from his job for misconduct; however he had taken his employer to an employment tribunal and had won compensation. In contrast the insurer would not accept his claim because of the terms of his dismissal, and would not take into account the tribunal decision.

A man sought advice from a Sussex CAB about a payment pro