Protecting your income has rarely been more important

September 17, 2008 | posted by Pam Atherton in Insurance, Loans, Mortgages, Store Cards | comments (0)

As the credit crunch takes hold, 40,000 workers in the financial services industry alone are expected to lose their jobs over the next year.

Some of the 4,000 Lehman Brothers employees, who are set to lose their jobs by the end of this week,  may rue the day they failed to take out income payment protection insurance in happier times.

Not to be confused with payment protection insurance (PPI) which only protects your credit card, loan or mortgage payments for one or two years in the event of accident, sickness or unemployment, most income payment protection insurance policies(IP) will pay out around half to two thirds of your monthly income until you are able to resume work, or until retirement if you can never work agan.

This means that IP is far more expensive than PPI - not only does it pay out for longer, but some occupations are clearly more expensive to insure than others. 

Builders, scaffolders and others in physically dangerous jobs are obvious examples, but in recent months, the employees of investment banks, estate agents and housebuilders have found it hard or impossible to get cover because of the widespread expectation of imminent redundancies in these sectors. Such workers may have no choice now but to go to a specialist broker to obtain cover.

This is why it is always best to buy IP when you least need it. When the economy is heading into recession, underwriters are clearly going to be extremely wary as to whom they are willing to insure.

But you can limit the cost of IP by accepting a long deferment period - the amount of time that must elapse before you can receive a payout. If your employer’s sickness benefits will cover you for the first 3 or 6 months of long term sickness, your IP policy does not need to kick in until then.

You will have to complete a medical questionnaire and for large amounts of cover, you may have to have to undergo a medical as well. It is also essential to be absolutely honest in your responses as insurers will not honour a claim if you have witheld ‘materially relevant information’ - even where the non-disclosure does not relate to your claim.

Regrettably, some insurers  exclude back pain and stress-related illnesses, even though these are the most common causes of long term absence from work.  It is therefore essential that you take independent financial advice so that you select a policy which meets your needs.

LV= recently launched a combined mortgage and lifestyle protection policy, while LifeSearch offers a product called ‘Real Life Cover’ which combines life, critical illness and income protection.

For more on IP, read the Defaqto guide:
http://www.defaqto.com/consumer/insurance/life/income-protection.aspx
www.LV.com

www.lifesearch.co.uk

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Competition Commission slates overcharging on loan insurance

June 5, 2008 | posted by Pam Atherton in Banking, Credit Cards, Insurance, Loans, Mortgages | comments (0)

An investigation by the Competition Commission into the payment protection insurance market has found that customers are being overcharged by £1.4bn a year.

PPI is insurance against not being able to pay off loans and credit cards, if you fall ill or get made redundant.

As expected, the Commission found that there was a lack of competition in the market and that customers are being overcharged and often mis-sold to.

It suggests that companies might be banned from selling PPI policies to customers when they take out  loans and that it might cap prices until greater competition drives down the cost of the insurance.

Commission deputy chairman, Peter Davis, said that lack of competition had arisen because policies are sold alongside loans, credit cards and mortgages, at the point of sale, without the customer having the chance to shop around and that this had led to high prices.

Many customers also do not realise that the insurance is often bundled into the cost of the loan and many are unaware of policy exclusions regarding employment status and medical history which might preclude them from making a successful claim.

Competition Commission deputy chairman, Peter Davis,  said that PPI providers were not competing either on price or quality of the product. “Neither do they appear to do much direct advertising of PPI to win customers from each other,” he said.

Mr Davis said the Commission would have to do further work to decide on remedies to the lack of competition.  But given that the PPI market has been under investigation for over two years, consumer groups expressed dismay that the Commission required further time.

But the report does suggest that advertising and marketing material should be in a standard format so that policies are more transparent and easier to compare. Policies should also be renewed annually, with customers being given an annual statement showing the policy’s cost, allowing them to can shop around and cancel the policy, if necessary.

The Financial Ombudsman Service has seen an upsurge in PPI complaints over the last year,  80 per cent of which have been upheld in favour of the consumer.

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Banks in the dock over PPI cover

May 28, 2008 | posted by Pam Atherton in Banking, Credit Cards, Loans, Store Cards | comments (2)

The Competition Commission is expected to issue a damning rebuke next month to the UK’s largest banks over their sales of payment protection insurance (PPI).

The Commission, which is due to publish its report in early June, is expected to accuse the banks of making excessive profits from PPI sales and that they have used these to subsidise cheap personal loans.

PPI is insurance to help individuals pay off personal loans, credit cards and mortgages if they are unable to work due to sickness or unemployemnt.

But it is often mis-sold to people such as as the unemployed, self employed and casual workers who are not normally eligible to claim. The cover is also expensive and only lasts for 12-24 months. There have been complaints about PPI being automatically included in personal loan quotations, without customers’ permission.

The Competition Commission is expected to announce sanctions early next month against the banks for the £1.5bn of allegedly excess profits they have made from the sale of PPI.

It is also expected to say that the sale of PPI is uncompetitive because it is sold to a captive market whereby customers havelittle choice but to buy it from the bank offering them a loan.

If the banks are forced to sell PPI separately or banned from selling it altogether, they are expected to recoup the lost revenue elsewhere, including increasing the interest rates they charge on personal loans.

The market is worth £5.5bn a year and in a provisional announcement earlier this year, the Competition Commission accused the banks of making profits of £1.5bn in excess of a reasonable rate of return for selling this product.

The Financial Services Authority has already fined a number of companies for PPI mis-selling, including HFC bank, an HSBC subsidiary and Land of Leather.

The Competition could impose various sanctions on the banks next month, including setting a price cap, banning banks from selling PPI or introducing more transparent sales practices.

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OFT to report on bank charges by end July

May 25, 2008 | posted by Pam Atherton in Banking | comments (0)

High Court Judge,  Mr Justice Andrew Smith, has forced the OFT and eight High Street banks to agree a timetable in the their legal tussle over the fairness of bank overdraft charges.

The judge allowed the banks to appeal against his ruling last month that the OFT has the right to assess  the fairness of unauthorised overdraft charges and their appeal is expected to be heard in September.

But Mr Justice Smith has ordered the OFT to divulge the initial findings of its investigation into the fairness of unauthorised overdraft charges by the end of July.
 
The banks have been keen to oppose regulation of charges for customers who go overdrawn without permission to protect the £2.5-£3bn of income this generates each year.

Following hundreds of thousands claims from customers for refunds of their overdraft charges in the county courts over the last year, the banks agreed to a High Court test case to examine two issues.

The first was whether the OFT is authorised to assess bank charges under the 1998 consumer contract regulations. The second was the fairness of the charges themselves, which the OFT has been investigating since April 2007.
 
The regulator and the banks agreed that if they could not agree on a fair level of charges, the issue would go to the High Court before Christmas for a ruling.

In the meantime, Judge Andrew Smith has ordered that the tens of thousands of unresolved cases before the county courts and the Financial Ombudsman Service must stay on hold.

To date, the banks have paid out £600m in refunds but could be liable for £5bn if the court finds in the OFT’s favour.
 
David Black, principal consultant of banking at Defaqto says: “Whilst it will clearly depend on the level of the [overdraft charges] cap enforced, it will almost certainly result in the current account landscape being changed significantly as the banks seek to make up any lost revenue in other ways.”

But a spokesman for Which? magazine said that 4 in 5 bank customers don’t incur overdraft charges and that 8 out of 10 people  would be willing to switch accounts if some banks introduced fees for in-credit banking.

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Banks to appeal against overdraft judgement

May 21, 2008 | posted by Pam Atherton in Banking, Credit Cards, Loans | comments (0)

Most of the UK’s largest retail banks are set to appeal against a recent court ruling on overdraft charges in a move that could result in years of litigation before the issue is resolved.

The Office of Fair Trading brought the case against eight major retail banks following claims for compensation from hundreds of thousands of bank customers about overdraft charges for bounced cheques and unauthorised overdrafts which could be as much as £30 per item.

Many complainants succeeded in winning compensation in the county courts but the deluge of cases brought chaos to the legal system and because county court judgements  do not set a legal precedent, each case had to be heard on its own merits.

Eight high street banks, including HSBC, Barclays and Royal Bank of Scotland, will seek permission tomorrow to appeal against the recent High Court judgement that overdraft charges are subject to unfair consumer contract regulations.

If the High Court judgement is upheld, the OFT would have the right to impose a limit on banks’ overdraft fees. To date, the OFT has not said what it would regard as a fair level of charges, but in 2006, it capped late credit card payment charges at £12.

Industry experts believe that a similar cap on overdraft charges would result in the loss of £10bn a year in revenue and that banks might seek to recoup this by charging customers for in-credit banking and other services.

Consumer groups, such as Which? magazine have argued that the overdraft charges levied by the banks are excessive, given that the cost of dealing with bounced cheques and unauthorised overdrafts is around £4 per item.

Anyone who has an existing compensation claim on hold will have to await the outcome of the litigation.

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Dramatic increase in second charge loans

April 25, 2008 | posted by Pam Atherton in Banking, Credit Cards, Loans, Mortgages, Store Cards | comments (3)

The dramatic growth in second charge loans being secured by creditors against debtors’ homes reflects the increased determination of creditors to get their money back, as the  the credit crunch drives up the number of households in serious debt.

The number of court orders issued by lenders to secure these charging orders rose 42 per cent in 2007 to 131,644, according to the Ministry of Justice.

Lenders have traditionally pursued debtors through the small claims courts for repayment, but the  rise in the size of unsecured household debt and the upsurge in bankruptcies have prompted creditors to  apply for a second charge on debtors’ property when that fails.

While charging orders rarely result in homeowners being re-possessed, they are a useful way for  creditors to ensure that they get repaid when the house is eventually sold, because a charging order will rank as as a second mortgage and be paid after the principal mortgage and any consolidated loans have been settled.

John Fairhurst of debt advisory company, Payplan, says the number of people with charging orders on their properties could be much higher than the official figures suggest, because the latter don’t account for instances where debtors voluntarily give their creditor a second charge on their home, in return for for a freeze on their debt or some other inducement.

Fairhust says: “A charging order gives comfort to the creditor that if the debtor goes bankrupt, they will get their money back, with interest. They are treating these orders almost as an insurance policy for repayment.

“The typical client we see has £40,000 of unsecured debt in the  form of credit card debt and personal loan,  which the creditor is unlikely to get back of in a bankruptcy,  whereas a second charge on a property will rank third or fourth. So it’s worthwhile for creditors to spend £200-£300 on a charging order.”

Payplan expects an upsurge in bankruptcies and IVAs later this year as the credit crunch limits the availability of easy credit for those with poor payment histories. The debt advisory firm makes its money by charging creditors 10 per cent of any money it recovers as a result of putting clients onto a debt management plan, although a few companies such as GE Capital refuse to do so.

“Some debt recovery organisations working on behalf of the big banks have become very aggressive of late, so I expect to see more charging orders in the coming months,” says Fairhurst.

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Is this the beginning of the end, or the end of the beginning?

April 22, 2008 | posted by Pam Atherton in Banking, House prices, Loans, Mortgages | comments (3)

“Will it work?” are the words on everyone’s lips in response to the £50bn lifeline thrown to UK banks yesterday by the Bank of  England.

The scheme, designed to alleviate the log jam in the money markets, will involve the Bank of England swapping around £60bn of banks’ mortgage liablities for nine month Treasury bills worth around £50bn, rising to £100bn in the coming months.
While we have seen nothing like this since the secondary banking crisis in the 1970s and the support is likely to remain in place for three  years, the scheme is limited in scope.

 It will only apply to mortgages, loans and credit card debt issued before the end of December 2007 as the BoE clearly doesn’t want to encourage new lending.

In addition, all these loans will have to be converted into AAA-rated securities before they can be swapped for Treasury paper.

But will this support scheme do the trick and will hard pressed homeowners feel any benefit any time soon?

I very much doubt it. Even though Abbey today announced that it is shaving 0.1 per cent off its two year tracker and flexible mortgages from 30 April, this is a drop in the ocean compared to the scale of the problems facing mortgage lenders - on both residential and commercial mortgages.

Last week I heard a property lawyer, who works for some of the major high street lenders and property companies, say: ”You ain’t seen nothing yet. Property companies  and residental mortgage lenders are in serious trouble.  It’s not just mortgage arrears, but fraud and tenants defaulting on rents. ”

One high street lender had taken a £880m hit due to mortgage fraud, he said, which if true, is likely to grow.  It is only when repossessed properties are sold at auction that the full scale of over-valued property (due to developers, solicitors and valuers working  in collusion), becomes apparent. 

“It’s all going to get a lot worse. This is just the end of the beginning, not the beginning of the end,” he said.

However, a spokeswoman for Abbey vigourously rejected the suggestion that any one lender had lost £880m due to mortgage fraud, saying that the Association of Police Officers estimated that the figure for the entire industry was around £600m.  Even that figure had been disputed by the British Bankers Association, she said. 

In the meantime, the Council of Mortgage Lenders will be pleading with the Chancellor of the Exchequer, Alistair Darling, today for more help for homeowners in mortgage arrears and facing repossession.

Currently state benefits don’t kick in until nine months’ of arrears have built up and only on the interest element of mortgages of up to £100,000.

After yesterday’s £50bn bail out of the banks and Labour MPs clamouring for the reinstatement of the 10 per cent tax band, the chances of the Government increasing state benefits for distressed homeowners right now are absolutely zero.

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