Financial institutions face a fresh crackdown on the sale of payment protection insurance, as the FSA announced that it was fining  Alliance & Leicester a record £7m for misselling PPI alongside personal loans.

It is the largest FSA fine for PPI misselling to date. The FSA said A&L’s failings were the “most serious” it has seen and that in telephone sales of PPI on unsecured loans, the bank had failed to give customers full details of the costs and had sought reasons to sell the product without properly considering the customer’s needs.

The FSA said A&L did not make it sufficiently clear that PPI was optional and that it had trained its telephone sales  staff to put pressure on customers if they queried the inclusion of PPI in their quotation or challenged advisers’ recommendations.

The fine comes as the FSA renewed its call for banks to reform their sales practices ahead of the increased ‘intervention’ it is planning. Earlier this year, the banks were accused of profiteering from PPI by amost £1.5bn a year on £5.5bn of sales and that profits had been used to subsidise cheap personal loans.

PPI pays out if you are unable to work due to accident, sickness or unemployment, but the cover only lasts for 1-2 years. Undisclosed previous medical conditions, unemployment andcertain types of employment can render these policies worthless, leading to a high rejection rate on claims.

PPI can be bought alonside personal loans, credit cards and mortgages.

Of particular concern to the FSA is the fact that customers were not always been told they would have to pay for the policy entirely upfront with a lump sum, on which interest is charged.

The FSA said that some institutions should consider stopping selling lump sum insurance policies on unsecured personal loans.

Defaqto insurance principal, Brian Brown, advised policyholders not to cancel existing policies as a kneejerk reaction: “At a time of economic downturn and rising unemployment, this is the very time to keep such policies going. You should only cancel a PPI policy if it is not appropriate to your needs or you would not be eligible to claim, so you should check the small print and with the insurer first, before doing anything.”

For more on Payment Protection Insurance:
http://www.defaqto.com/consumer/insurance/life/income-protection.aspx

For more on long term income protection:
http://www.defaqto.com/consumer/insurance/life/income-protection.aspx