Payment protection insurance subsidising unprofitable loans

January 29, 2008 | posted by Pam Atherton in Banking, Credit Cards, Insurance, Loans, Mortgages, Store Cards | comments (1)

A study by the Competition Commission has confirmed what we all knew already – that payment protection insurance (PPI) is fabulously lucrative for the banks and that without this income stream, theire personal loan business would be largely unprofitable.

According the Commission’s report published yesterday, the banks are raking in £2.2bn and £2.6bn a year from PPI, but in 2006, even with PPI sales included, their personal loan business was only marginally profit making.

This was due to the large number of new entrants to the market – a trend which served to drive down the APRs charged on personal loans, thereby increasing banks’ dependence on PPI to make a profit.

Typical commission rates were 50-80 per cent for PPI sold alongside personal loans and credit cards, and 40-65 per cent when tied in with mortgages, with the banks typically taking 90 per cent of these commissions.

While everyone wants to see banks offering competitively priced personal loans, if this is being paid for by a hidden cross subsidy, in the form of PPI, this is unhealthy and unfair on the customers who are paying for it.

Given that a large percentage of PPI customers have little understanding of the product, and a large percentage of policies have been mis-sold to individuals who will never be able to make a claim (because they are unemployed, self employed or contract workers), this is all the more inequitable.

While PPI can be useful for some people, most customers would be better off buying a policy from a stand alone insurer like the Post Office, which charges just £4.50 per £100 of cover, compared to the typical £8.50-£9 per £100 of cover charged by most of the high street providers.

Regrettably, too many banks continue to sell PPI tied in with loans, credit cards and mortgages, by automatically including it in quotations. The sooner this pernicious practice is outlawed the better. For more on this scandal and how to claim compensation for a mis-sold policy.

visit: http://www.mortgageguideuk.co.uk/blog/mortgages/payment-protection-insurance-for-loans/

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Government sets dangerous precedent by underwriting Northern Rock bonds

January 21, 2008 | posted by Pam Atherton in Banking, Loans, Mortgages, Savings | comments (1)

By announcing plans to convert Northern Rock’s £25bn Bank of England loans into bonds, so they can be sold to investors, thereby hastening the sale of the stricken lender to a private buyer, the Government has set a dangerous precedent.

Let’s just be clear on this. The Government is using £25bn of taxpayers’ money to underwrite these bonds until further notice, while £30bn of taxpayers’ money was used to guarantee Northern Rock deposits 100 per cent last September.

The scheme announced today to turn Northern Rock debt into government commits UK taxpayers to Northern Rock for many years and brings the bank’s support package to an unprecedented £50bn.

This is all fine and dandy if it enables Gordon Brown and Alistair Darling to escape the humiliation of nationalising Northern Rock.But the support given to Northern Rock’s savers last September alone, has already had the knock-on effect of forcing the Government into a humiliating U-turn on the issue of compensating the 125,000 pension victims of collapsed final salary pension schemes to the same level as the Pension Protection Fund.

The Pensioners’ Action Group quite rightly pointed out the hypocrisy of the Government’s £30bn guarantee to Northern Rock savers, when those who had lost their pensions were being fobbed off with inadequate compensation.

Many of the pension victims had joined their schemes as a condition of employment or had been told by Government agencies that their benefits were guaranteed. By contrast, no one was forced to save or borrow with the Northern Rock

What other pressure groups will the Government now be beholden to as a result of the Northern Rock bail out? The mind boggles. There could even be hope now for the Equitable Life victims and any other group of investors who have suffered financial loss as a result of company mismanagement.

So despite the drawbacks of nationalisation, Gordon and Alistair may live to rue the day they chose to save this stricken Northern institution. The real cost of their decision will play out in the years to come.

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Time to end payment protection insurance scandal

January 18, 2008 | posted by Pam Atherton in Banking, Insurance | comments (1)

News that HFC bank, a UK subsidiary of HSBC’s US operations, has been fined £1.1m for failures in its selling of payment protection insurance (PPI) makes me wonder why we are not hearing about more such fines from the City regulator.

In a mystery shopping exercise I conducted last year of half a dozen major high street banks in the City of London, when asking for a quotation for a £5,000 personal loan, every single bank automatically gave me quotation including PPI. It was only on request that I received a quote without the insurance.

The same tends to apply online, where the majority of quotations have PPI included as the default option.

The difference between a loan with, and without PPI, can be as much as 40 per cent, if the insurance is added to the cost of the loan – a pernicious practice still employed by some lenders, according to the Financial Ombudsman Service.

This is a staggering amount for something you haven’t asked for and may not even be eligible for. None of the banks asked me about my employment status and whether I was self employed, a seasonal or contract worker – which would have precluded me from claiming on the all the policies in question.

But perhaps the message is finally getting through to consumers that they are being royally ripped off, in many cases, with these policies. The Financial Ombudsman Service says it has seen an upsurge in complaints – 5,000 since April 2007, with 970 in December 2007 alone, and that PPI is attracting more complaints than any other area of financial services.

Significantly, the FSA is upholding 80 per cent of complaints in favour of the consumer, so more fines must surely be imminent.

But what the FSA really needs is the power to name and shame the companies generating the highest volume of complaints, along with the percentage of cases upheld in favour of the customer. At the moment, the FSA is not allowed to do this, making a nonsense of its regulatory work.

Regulatory fines can be paid and forgetten about quickly, whereas reputational damage is far more effective as a deterrent to ongoing abusive behaviour. I can only hope that Lord Hunt, who is currently writing a report on this very issue, will recommend the naming and shaming of errant companies. Such a proposal can’t be implemented too soon.

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