So, how did PPI unfold?

The debacle surrounding the mis-selling of Payment Protection Insurance (PPI) is thought to be one of the costliest scandals in financial history.

It has attracted widespread media attention, provoked outrage from customers and has shaken the financial industry, but how did it all start and what do the next couple of years hold?

What is PPI?

PPI was an insurance policy which was taken out at the same time as a loan, mortgage or other financial agreement. It offered protection for repayments of the loan, should the borrower fall ill, lose their job or be involved in an accident. Many different types of loans had the option to purchase PPI - from a standard bank loan to a hire purchase on a car.

Why was the scandal brought to light?

In 2005 it emerged that some customers which were paying for the cover could not use it, didn’t need it or did not want it. Some consumers were too old to be covered by the policy, others already had policies in place, meaning that Payment Protection Insurance was worthless.

The regulatory body at the time, Financial Services Authority (FSA) took over regulation of its sale in 2005 and issued a report that highlighted the substandard dealings that had taken place. They noted that as PPI tended to be a secondary purchase, consumers tended not to compare prices to get the best deal. They added that the product was ‘relatively complex’ and was often sold to vulnerable individuals.

Statistics found by a report conducted by which? In 2008 noted that one in three with a PPI policy may find it a worthless investment, as there would be some small print that would prevent them from claiming.

What’s the result?

Once the scandal came to the public eye, it had serious repercussions. It is estimated that the banking and financial industry have set aside as much as £20 billion to cover the cost of redress for their customers. This number has been increasing as more and more claims came to light, and is now at much more than originally expected.

The Financial Ombudsman Service (FOS) is dealing with as many as 2000 new cases a day, with 80% of the enquiries it receives relating to Payment Protection Insurance.

The scandal is far from over. Earlier in 2014, interim chief executive and chief ombudsman of the FOS Tony Boorman revealed the UK was not out of the PPI woods just yet, meaning it is likely to be an issue that continues to be involved with media attention.

 

Posted on Tue 20 May 2014