It looks as though class action litigation could become a reality in the UK in the foreseeable future.

Tens of thousands of consumers are to be encouraged to join a £350m lawsuit against an HSBC subsidiary over the mis-selling of payment protection insurance (PPI).

Law firm, Clyde & Co, is to bring a group claim against HFC bank after it was fined £1.1m by the Financial Services Authority for selling PPI policies without checking whether they were appropriate for the individuals concerned.

Before the case against HFC can move forward, lawyers will have to sign up a group of consumers who bought the insurance policies and who believe they were mis-sold to. The firm plans to use advertisements in The Sun, the Daily Mail and other newspapers to draw attention to the complaint over the next few weeks, a tactic commonly used in US class action lawsuits.

The PPI market has been the subject of intense regulatory scrutiny in the last few years, following accusations that it is expensive and frequently mis-sold to individuals who will never be eligible to make a claim because they are unemployed, self employed or temporary workers.

They are designed to protect an individual’s income in the event of loss of income due to accident, sickness or unemployment and are sold alongside credit cards, personal loans and mortgages.

But PPI is hugely lucrative to the providers who sell it, earning as much as £1,200 from a policy that costs only £20 to sell. The profits are believed to have been used to cross subsidise cheap personal loans, according to the Competition Commission, meaning that borrowers who did not take out PPI have benefited at the expense of those who did.

 HFC sold more than 163,000 PPI policies between January 2005 and May 2007, mostly to consumers with poor credit histories and limited access to financing. At an average cost of £2,000 per policy, Clyde & Co estimates that its claim could be worth as much as £350m.
 

The FSA fined HFC £1.1m in January for failing to maintain adequate systems and controls when selling PPI.  But while legislation outlawing price-fixing and anti-competitive practices specifically authorises consumer bodies to launch group claims in some circumstances, there is no equivalent statutory provision for FSA rulings.

Clyde & Co will have to establish that HFC is liable to consumers for breaching the FSA’s codes of  business conduct, which the firm concedes may be fresh legal territory. Whether the £1.1m penalty, the 12th largest meted out by the regulator, will be sufficient to shame HFC into compensating claimants in  a lawsuit remains to be seen.

But if successful, it will be interesting to see whether a flood of class actions from other groups of aggrieved consumers follows suit.

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/