I thank Mr. Speaker for selecting this subject for debate. Payment protection insurance is very important, and is much wanted just as people are losing their jobs. However, what has been sold, in a widespread manner, can only be described as not fit for purpose. It is failing people, and it has been a disaster.
Payment protection insurance is typically sold with personal loans, credit cards and finance agreements to help individuals to repay what they owe if they are unable to work due to sickness or redundancy. It is big business. It is estimated that in 2006, 20 million PPI policies were in force in the UK, but as I said, they are deeply flawed and clearly problematic.
I came to the matter when I saw an article about a Competition Commission investigation into PPI that estimated that companies offering such policies were overcharging consumers by a massive £1.4 billion each year due to lack of competition in the market. I tabled a parliamentary question in July 2008 and received an answer from a Treasury Minister. I asked the Chancellor
"what steps his Department proposes to take on overcharging in relation to payment protection insurance policies as reported by the Competition Commission."
The Economic Secretary to the Treasury replied:
"The Competition Commission's report...is a provisional findings report. Her Majesty's Treasury will maintain a close dialogue with industry and the independent Financial Ombudsman Service, Financial Services Authority, Competition Commission, and the Office of Fair Trading."—[Hansard, 21 July 2008; Vol. 132, c. 725W.]
That is a helpful reply, but the Treasury clearly needs to act on its work with those organisations.
Which? staff followed up my question and met me. Which? believes that PPI is a fundamentally bad product that can cost an individual thousands of pounds yet lets them down when they most need it. Research by Which? and an investigation by the Financial Services Authority also found widespread mis-selling in the market, as salespeople use high-pressure tactics to sell unsuitable PPI to vulnerable customers. Which? said in a letter to me that
"as many as 2 million loan PPI policies" may have been mis-sold. Even when PPI policies are sold according to the rules, they can often add between £2,000 and £3,000 to the cost of a £7,500 loan, which then attracts interest. That can be a massive financial burden for individuals on low incomes, who are more likely to take out PPI, as the Competition Commission reports.
The problem has been going on for a long time, and the FSA simply has not got to grips with it until now. It has started to, but it is not doing enough. Like the whole banking system, the FSA has been asleep at the wheel. It needs to get its act together, and the Government need to chase it up.
What is wrong with PPI? Which? has been campaigning about it for 10 years, and published a report last October pointing out the main problems. It is expensive, as I have mentioned. When it is sold alongside a loan, it is often added to the amount, attracting interest throughout the term of the loan, even when the insurance has expired. It is not fit for purpose. It has numerous deficiencies; it often pays out only for a limited time, such as 12 months, or pays only the minimum repayment amount each month on credit cards rather than paying out the amount borrowed.
PPI is mis-sold. Research by Which? and the FSA shows that advisers often fail to make it clear that the policy is optional, do not mention exclusions that would prevent an individual from being able to claim and do not properly explain the payment methods for the insurance. Many individuals do not need PPI, as they are covered through their employer. Others would be better off with an income protection policy instead.
A lot of shady practices go on. An article in The Independent on Sunday on
"It might seem technical, but real income protection policies offer much more valuable benefits—ones that those who buy ASU miss out on."
The article quoted Kelly Ostler-Coyle, spokeswoman for the Association of British Insurers, which represents the insurance companies, who said:
"There are differences between income protection and ASU policies, and it is important that consumers are able to understand these through product literature.
We expect our member companies to ensure all their products are properly labelled and that policy terms and conditions are written in clear language that consumers can easily understand".
Well, Ant and Churchill did not do that in the case I have mentioned and many other companies have not done so.
Egg, for example, has just been fined by the FSA for aggressively and unfairly selling policies and even for selling unsuitable policies to customers. It sold 106,000 credit card PPI policies at an average cost of £156. The FSA finally got its act together in December last year and fined Egg for those failings. The fine amounted to £721,000, after Egg obtained a 30 per cent. discount for settling early with the FSA.
What Egg was doing was out of order. It made calls on spec to all sorts of people, including its customers. It did what is called objection-handling, so when the customer said, "I don't want it", pressure was put on them through all sorts of sales techniques. It overemphasised the positive features of the PPI, offered inducements, such as a free period, and said that people could cancel the insurance later if they did not want it—but the company did not proceed with the cancellations. In some cases, even where the customer did not consent, the PPI was applied to their credit card anyway. That was malpractice. Egg is expected to pay £1.67 million for every 10 per cent. of customers who receive a refund.
The FSA has finally got its act together, although it is questionable whether that is sufficient, in such circumstances, to change what has been going on. However, it is not just Ant, Churchill and Egg. Alliance & Leicester, Barclays, the Co-operative Bank, the Lloyds Banking Group, RBS and NatWest, for example, are all pulling out of the PPI market for unsecured loans, which implies that they were mis-selling or, at least, that PPI was not being applied as a proper protection policy.
The FSA has taken enforcement action against 20 firms found guilty of failings with PPI, including HSBC, Land of Leather and Liverpool Victoria. In its research, Which? shows that as many as 2 million loan payment protection insurance policies have been sold to people who may never be able to make a claim because of the exclusions and other aspects of the policies.
According to the Competition Commission, 4,343,466 active single-premium PPI policies had been distributed by the 12 largest distributors by the end of 2006, so there are a lot of problems, because those stand-alone single-premium policies were sold alongside loans or finance agreements. The PPI was sold as a single-premium policy, which means that a lump sum covering the cost of the insurance was added to the amount that the customer borrowed. The customer ended up paying interest on both the insurance premium and the loan, which was an extra burden on them.
The PPI policies are unreasonable when applied to credit and store cards, because they often last for only five years, so if the loan or finance agreement is for longer than five years, the individual will still be paying interest on the policy long after it has expired.
I congratulate my hon. Friend on raising this issue. I, like him, met Which? to discuss the matter, and it has come to my attention that if someone is in the habit of using a credit card and pays off the balance of the monthly account within the normal time limit, they could be double charged. If the bill arrives mid-month, they are given three weeks to pay, but if they purchase in-between times and leave it until the last two or three days to clear the account, payment protection insurance is charged not once but twice.
That is a well-made point, detailing another serious flaw that is unfair to consumers. There are some really unfair practices going on. Which? is not alone in pointing them out; Citizens Advice, in its parliamentary newsletter to Members last year, called PPIs a "Protection Racket" and said that they are
"over expensive and often unsuitable and that lenders are ripping off, rather than looking after their customers."
We are talking about borrowers who are trying to be responsible by taking out such insurance, but they are being ripped off and far too many of them are not protected. Citizens Advice also cites the example of
"a full-time employed homeowner who had taken out a secured consolidation loan for £60,000 with an additional loan for £15,000 for Payment Protection Insurance in case he lost his job, or suffered ill health. The client didn't realise that the PPI was only for 6 years, despite the term of the secured loan being 20 years. As such, the client has had his indebtedness increased by £15,000 for little discernible benefit, being unable to cancel the PPI or arrange other cover."
The Minister used to be a Minister in the Department for Work and Pensions so he will be aware of the point that I am about to make, because there is a benefits deduction aspect. Which? told me:
"However, we are concerned that an individual receiving money as the result of claiming on a stand alone protection insurance policy is likely to see their entitlement to means-tested state benefits affected. The key trigger is that the payout is paid to the policyholder and is therefore viewed as income by the DWP. This leads to a reduction by 50 pence in benefit payments for every £1 of insurance payout received.
We feel that under these circumstances, it is unfair that benefits should be affected, and should not be classed as income when assessing entitlement to benefits. We believe this issue needs to be addressed to ensure that people taking responsibility for their finances through protection products are not penalised."
That is unfair. At the very least, customers should have their position explained to them.
In the time remaining, I shall discuss what the Government should do. The FSA has not been tough enough; it needs to step up its enforcement activity and there must be higher fines for mis-selling. Where mis-selling has taken place, customers must have a remedy that informs them and gives them the right to seek and receive redress. They should be able to claim back PPI premiums where they were mis-sold, and robust, value-for-money protection products—proper income protection—must replace PPI.
The Competition Commission's final report is due before the statutory deadline of
"up 113 per cent. in October 2008 compared to a year before", but are they being paid out, or do all the exclusions come into play?
The FSA needs properly to monitor the situation to ensure that claims are paid out and that any loophole is properly investigated to see if there was a case of mis-selling. There needs to be a change in the whole market in relation to the products. There should be proper income protection, not get-out clauses. It is a tragedy that the FSA has been asleep at the wheel, because this is the very time when such protection is needed—when unemployment is increasing. The Government need to step in and sort out the market, so that it is proper and fair for consumers.
I congratulate my hon. Friend Harry Cohen on initiating such a timely debate and on shining a bright light into some slightly dark areas of our financial system. I shall not detain hon. Members long, but I want to raise with my right hon. Friend the Minister the case of my constituent, Mr. Mohammed Aitkaddour. He voluntarily entered into payment protection insurance for his mortgage and was explicit, when he took out the policy, about the fact that he was suffering from back pain, so that was a specific exemption in his policy. However, his wife, Alison, came to my surgery at the beginning of December to say that Mr. Aitkaddour's diagnosis was actually lung cancer that had metastasised into a tumour that was affecting his spinal cord, so the back pain had been caused by the lung cancer tumour.
Alison had been in contact with Halifax Insurance Ireland Ltd and it had refused the claim. The only reason why my constituent had not been in trouble with her mortgage company when her husband was signed off as unable to work was that she had taken time off from her job at a local school and was having the first three months of sick pay, so she was on full pay and was just about able to nurse her husband through his illness.
Given the gravity of the situation, I wrote immediately to Halifax Insurance Ireland, but was quite astonished by the letter that I received from the company on
"I can confirm this matter has been...investigated. However, we are unable to discuss specific claim details with third parties. Please be assured that Mr. Aitkaddour has been contacted detailing the outcome of the claim and the reasoning behind the outcomes of our investigations."
That is the first time, as a Member of Parliament raising a constituent's issue, that I have been fobbed off in quite so egregious a manner. It was left to me and my staff to contact Mrs. Aitkaddour in the new year to find out what had happened with her claim. On contacting her, we discovered that Mr. Aitkaddour had died on
I raise that case with the Minister as an example of a responsible citizen being absolutely honest and open about his medical condition. Had his wife not been in work, they would have been in mortgage arrears. She would now perhaps be in the first stages of house repossession. The way that these companies handle people's claims, even when there is parliamentary intervention, leaves a lot to be desired. We need to ensure that people who are mis-sold these policies have a remedy. I am perhaps more cynical than my hon. Friend the Member for Leyton and Wanstead, but I think that one of the reasons why so many companies are getting out of the insurance market in these difficult economic times may be that they are not making quite as much money out of people as they were in the good old days.
I, too, congratulate my hon. Friend Harry Cohen on securing the debate. I am grateful to him for drawing our attention to this important issue, and for drawing his concerns to my attention previously as well.
Payment protection insurance is potentially an important product. When sold properly, it protects someone's ability to maintain loan repayments and helps people to avoid getting into debt should they be unable to keep up repayments from their own means because of accident, sickness or unemployment. However, while endorsing the potential value to consumers of this type of product when it is sold in a proper manner, I entirely accept the argument made by my hon. Friend, and indeed all those who have contributed to the debate, that such products are often sold incorrectly; they have often been mis-sold. That is the heart of the problem.
Typically, PPI cover is purchased through the lender at the same time as the credit agreement. High street retail banks and building societies account for about 80 per cent. of the PPI policies that are sold. It is not usually compulsory to buy PPI. Some lenders, however, may suggest that mortgage PPI is appropriate for some customers. It can be sold as a single-premium policy or as a regular-premium policy. The concerns of my hon. Friend centre on the single premium variety in which the premium is due at the start of the cover period—it is often added to the loan with interest costs attached—and has complicated redemption fees.
PPI compensation is generally payable in the event of a reduction, or complete loss, of income, and is usually paid at monthly intervals for up to 12 months. However, about 25 per cent. of PPI claims are rejected, as has been mentioned. I am glad that the claim in case of the constituent of my hon. Friend Mary Creagh was ultimately honoured. The main reasons for rejection are the identification of a pre-existing but unacknowledged condition, voluntary unemployment, the claimant not being actively at work when the claim event took place, the qualification period not being met or the claimant not being in 12 months' continuous employment before the insurance contract was entered into.
Insurers compete to provide PPI policies to lenders, which then distribute the PPI policies alongside their credit agreements to consumers. There is often profit sharing between the lender and insurer—usually through commissions or bonus agreements—with the final price being set by the lender. Although consumers can buy PPI independently of the primary product provider, it is not common practice for them to do so. Sometimes that is because they do not know that they can.
My hon. Friend the Member for Leyton and Wanstead set out the criticisms that are levelled at PPI. He says that there is a lack of competition in its sale, which leads to high prices, and that it is poorly understood as a product. Efforts have been under way since 2005 to investigate and address those criticisms, involving organisations that are independent of the Government. The Financial Services Authority, which is the lead regulator, the Office of Fair Trading, the Financial Ombudsman Service and the Competition Commission have all been involved.
The FSA has been regulating the sale of general insurance, including PPI, since January 2005. It recognised that PPI was a complex retail product, and its sale was identified as an area of higher regulatory risk. The FSA set up a regulatory programme to improve sales standards, limit consumer detriment and raise consumer awareness. As a result of that programme, the FSA has taken enforcement action against 20 firms, as my hon. Friend acknowledged, and issued almost £12 million in fines.
The most recent action involved the FSA telling firms last week that, if they are not capable of selling PPI properly, they should stop selling it. A number of lenders had already ceased to sell single-premium PPI for unsecured loans, and several more have announced that they will withdraw from the market. My hon. Friend listed a number of organisations that have done so.
The FSA has also taken action to improve the selling of PPI for mortgages and credit cards. My hon. Friend Mr. Brown touched on the credit card issue, and my hon. Friend the Member for Leyton and Wanstead mentioned the recent fine imposed on Egg, which was accompanied by an order that it conduct a review of all past sales.
The financial ombudsman offers those consumers who have been mis-sold a PPI policy an opportunity to seek redress if they are dissatisfied with the results of their complaint to their provider. The ombudsman plays an important role. He ensures that consumers do not lose out financially by making awards to them. Those awards act as incentives on firms to ensure that mis-selling is minimised, because if they continue to mis-sell, they will be penalised financially.
There has been a marked increase in the volume of PPI complaints received by firms and the financial ombudsman, who is receiving more than 500 complaints a week. Following an application by the ombudsman to the FSA, the FSA is considering ways to speed up the processing of claims. In April 2006, the OFT launched a market study, separate from the FSA investigation, to look in depth at PPI. It found evidence suggesting that how consumers purchase their PPI, their understanding of the product and the quality of information available to them hinder competition in the way that my hon. Friend indicated.
As a result, following consultation, the OFT referred the UK PPI market to the Competition Commission for a market investigation, as my hon. Friend also mentioned. The Competition Commission reported its provisional findings in June 2008. It found that, although PPI can offer useful cover and peace of mind in the event of customers having trouble meeting repayments, products can be overpriced and of poor value. The combination of the point-of-sale advantage and insufficient customer awareness and information means that PPI products might not face proper competition. The commission proposed several draft remedies, including a prohibition on selling single-premium PPI policies, an obligation to provide an annual statement of PPI costs and a reminder of consumers' right to cancel. A number of those remedies have been consulted on and the final report will be published by the end of next week when we shall see the conclusions drawn on the changes needed in this area.
My hon. Friend mentioned the impact on means-tested benefits of receiving payments through PPI. Generally, PPI payments made direct to lenders so that they can make their mortgage repayments, for example, are not treated as income for the purposes of calculating means-tested benefits. I understand that it is open to anyone who buys a PPI product to arrange for any payments from that product to be made direct to the lender. If that is done, the customer is protected from the concern that my hon. Friend rightly raised.
Some payments direct to consumers might be disregarded for that purpose as well, but that is a slightly more complicated matter. However, it is possible to ensure that PPI payments are not made direct to the lender, in which case there will be no impact on the means-tested benefit. However, my hon. Friend is right to draw attention to that matter, because clearly it could make a huge difference to the value of the product to the consumer.
It is clear from the sheer volume of work—not least the number of complaints received by the ombudsman—that there have been significant problems in the market. I am grateful to my hon. Friend for drawing attention to them and for the work that he has done. It is also clear that the independent regulatory authorities are aware of the scale of the problem and are taking action where it is needed. Poor sales practices are being addressed, and consumers who suffered from them can apply for redress, either to the firm that sold them the policy or, should that fail, to the financial ombudsman. I hope that, as a result of this debate, more people will be aware of the steps that they can take to secure their own position.
Question put and agreed to.