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The credit insurance rip-off

Robert Peston | 11:31 UK time, Thursday, 5 June 2008

A culture in our banks of taking unfair advantage of ill-informed and unconfident borrowers has been exposed by the Competition Commission.

Credit cardOur biggest banks can take no pride in the provisional findings of the Commission's review of the sale of credit insurance to cover the risks that we won't be able to keep up payments on personal loans, credit-card debt and mortgages.

That said, I have doubts about the way that the Commission has equated profit in excess of cost of capital with overcharging - and on that basis says consumers are being ripped off to the painful tune of more than £1.4bn.

But the evidence is clear. Competition in the market for "payment protection insurance" is inadequate. And the distributors of this stuff are making excessive profits from it.

It is absurd that in two-thirds of personal loans covered by this insurance, the annual cost for the consumer of the insurance is the same or greater than the cost of servicing the debt.

That implies either that the banks are making no provision for the risk of default when setting the interest rate, which seems unlikely. Or the cost of the insurance is wholly disproportionate to the risks it is supposed to cover.

The Commission is careful not to make allegations that particular banks are sharper operators than others.

But it does point out that the distributors with the largest share of this market are Lloyds TSB, Barclays and HBOS.

So should we just say hooray and assume that consumers can look forward to a better deal?

I would be slightly cautious about the consequences for borrowers.

The Commission has come up with a series of possible remedies, whose aim would be to generate proper competition in the provision of this insurance that would drive down prices.

It has even mooted a temporary price cap.

However there is bound to be an element of cross-subsidy between the excessive profits banks charge for this insurance and what they charge for personal loans and mortgages.

Removing that cross-subsidy could lead banks to increase the explicit costs of credit.

Note also that in our decelerating economy the risk of lending for banks has risen - and they are already charging most of us more for loans.

So something has got to give, on the assumption that the Competition Commission succeeds in slashing what the banks receive from insuring us against the risk of default at a time when the risk of default is rising fast.

That something would either be a further sharp contraction in the amount of credit banks make available or a further sharp rise in the interest and other charges on what little credit is offered.

Ouch.

Comments

  • Comment number 1.

    It's so easy for a bank to tell a customer who really needs a loan that insurance is highly recommended.

    It then appears to be the deal clincher. There is no doubt that it is sold under pressure.

    Yet the interest rate does not decline accordingly.

    Of course, the most vulnerable are the ones who get screwed the most.

    It's going on wholesale because the authorities care far more when some working class git robs the bank managers car.

    It's the class system.

  • Comment number 2.

    Robert says "A culture in our banks of taking unfair advantage of ill-informed and unconfident borrowers has been exposed"

    Yes, these are the same banks with whom the FSA are constantly trying to get in to bed with !!

    Time and Time again the banks run rough shod over their customers with little or no "TCF - Treating Customers Fairly". Yet the Regulators (mainly ex bankers !!) turn a blind eye to these rip offs.

    The FSA is not fit for purpose - every year hundred of millions of pounds is spent by the FSA 'regulating' financial advice when their seems to be no regulation of financial products !!

    So now when a problem comes along we are no longer talking about millions of pounds BUT BILLIONS of pounds of RIP OFF !!

  • Comment number 3.

    It is a good twenty years since I last took out a bank loan and I can recall declining the insurance offer as through the life of the loan it amounted to a quarter of the total sum borrowed. This did not affect the bank's attitude to lending me the money.

    When almost everybody wants credit, as has been the case for the last few years, then the userers can charge almost what they like as there is no top to the market.

    The reality that the banks have been riding on the back of a credit splurge should be of no surprise to anyone now, but it is amazing how they have allowed their customers to be suckered into the nonsense. Is this what is meant these days by customer service?

    The Competition Commission is telling us something we already know and have known for quite some time; namely, the banks have plundered their customer base.

    What a way to run any business, let alone a bank in the High Street?

  • Comment number 4.

    In no way am I defending the banks who has elevated usuary to an art form, but why can't the customer work out the cost for themselves? The problem is, the customer is so keen to get their hands on the money and the banks were so keen to oblige, that the customer saw only £xx on top of the loan repayment.
    Surely the best way is to take out a policy with life cover of however much you want to borrow, pay the premium to the insurance company who would charge (I guess) a third of the bank's premium and at the end of the term, you've got a few bob for your pains and if you should turn up your mortal coil, the bank can be repaid from the cover taken out.
    Am I being too simplistic?

  • Comment number 5.

    12 years ago I refused to take on this type of insurance as not only was it excessive, I was also paying the full sum for the whole loan period up front and then paying interest ontop of that!
    I didnt really believe them when they said being self employed wouldnt make any difference either....my suspicions have been proven correct thousands of times since.

    So I have to ask. What took them , the "competition commission" whoever they are (another Quango with good pension right may I hazard a guess?) anyway,sooooooo long to figuer this out?

    Plainly they need some competition so they dont take well over a decade to discover something that has been common knowledge for at least that time.

    Or are we supposed to not notice something else.....

  • Comment number 6.

    re #4

    No, you're not being simplistic. For anyone that feels like they may be suckered in by the banks it is always worth taking out protection elsewhere, after all, monthly insurance is always going to be less than paying a loan for the same insurance.

    this is similar to the holiday insurance that the travel agents used to offer with their packages that many people took out in the mistaken belief it was no cheaper anywhere else.

    Nuff said

    EM.

  • Comment number 7.

    The banks never miss a trick if they can help it.

    On the last 2 occasions I have paid in a cheque over the counter (in one of the big 4) I have been "advised" that the account manager wanted a word about my account. Turned out they wanted me to take out insurance(s) with them. Second time this happened I "advised" the cashier in a loud voice that I was not interested in seeing the account manager as I knew they just wanted to sell me something. You can't blame the counter staff for this annoying habit as they no doubt have targets to meet but I for one object to this high pressure approach to sales. If I wanted insurance I would ask for it.

    I suppose the thinking goes that some people will fall for it but it just serves to make me want to switch my account. Unfortunately since they're all at it there's nowhere to switch to! Perhaps it's better to avoid using the counter service at all.

    By the way, I also tried to post a comment yesterday and I think something was broke as it just disappeared into thin air!

  • Comment number 8.

    The probem with PPI products is that they contain to many loopholes so banks can excuse themselves out of the PPI itself if a customer tries to claim on the PPI.
    The FSA should close up such loopholes and demand that if a bank doesn't pay out in so many cases per 100 it would review each case to close any further loopholes the bank is trying to exploit.
    With no loopholes in such PPI products the banks would be likely to reduce the costs of such products and try and get more customers to sign on better terms for themselves to maintain the profit levels they enjoy while customers get a better level of protection from such products.

  • Comment number 9.

    Why is anyone surprised?

    We're talking about a business that is predicated entirely on lending out money that they don't have.

    They're scam artists pure and simple.

  • Comment number 10.

    The banks need to be taught that they are in a competitive and static business where costs, expenses, and profits need to be cut to the bone.
    The banks are no longer in a seller's market where they can ask what they want and make whatever rules they want to maximise their profits. That era is dead.
    Those banks who took most of the credit-card business and charged extortionate APRs as a means of off-setting the risks of default, are also beginning to realise that many of the borrowers can't and won't repay their loans.
    These banks believed that they had no more need to check the individual's spending patterns and ability to repay a credit card than they did to make comparable checks on mortgage applicants, and that they could rely on statistics to tell them how much money they would make.
    They are beginnign to wake up to the truth now and they don't like it!
    However I amd sure they will find some other way to fleece their customers with expensive services, and that the C.C. will step in too late once again.

  • Comment number 11.

    The CC findings showed that the banks were cross-subsidising low loan rates by sales of PPI. That would be fine, but the people most likely to be sold PPI are from lower incomes. So poorer people are being used to fund cheap loans for the better off!
    Without a doubt we will all have to pay the true cost of borrowing in future, and credit prices will go up.
    The banks will get their money from somewhere, whether it is PPI or higher loan rates. It is just a question of what is the fairest way to get that money.

  • Comment number 12.

    > So something has got to give, on the
    > assumption that the Competition
    > Commission succeeds in slashing what
    > the banks receive from insuring us against
    > the risk of default at a time when the risk
    > of default is rising fast.

    More failings of the free market system are exposed every day in rip-off, money obsessed, greedy Britain. And each time, a “regulatory patch” is applied as if it will work this time. Of course, it rarely does.

    Yet we pretend to be surprised each time, and we stick another patch on the system. They say hope springs eternal, but it just gets stupid in the end.

    If the banks do business here, they have to agree to work _with_ us. If they can’t share our goals, and go about ripping us off willy nilly, then they’re just a drag. We’re supposed to be building national cohesion, and we don’t need clowns pulling it apart.

  • Comment number 13.

    The insurance industry are happy... eager even to provide mortgage insurance...

    It took me all of two minutes to look it up and most of that time was spent mistyping the name of the search engine...

  • Comment number 14.

    If my understanding is correct the only party that benefits from this whole class of insurance is the lender. It is just another part of the cost of a loan.

    Far too many times all one hears is that when an event occurs that the borrower thinks is insured there is some small print that prevents the insurer from paying out.

    Please use more plain English in the policies. It may be that the doctrine of uberrimae fides applies to the policyholder disclosure but in all equity it should also apply to the policy writer. The policy holder should be required to explain the policy's terms in such away as the policyholder has understood them - perhaps this could be judges by asking the policyholder to complete a multiple choice questionnaire after reading the policy!

  • Comment number 15.

    It's hard to see where the banks are going to make any profit in the next few years.

    They are being hammered now on unfair bank charges and these overpriced insurance policies. They are having to write off bad debts and not able to sell as many new mortgage products. Many of their existing mortgages are on rates linked to base rate, which is lower than LIBOR.

    I am expecting big job losses. Let's hope all those bankers have decent PPI themselves!

  • Comment number 16.

    #15 wykhamist

    Yes, dearth of profit must be a worry although solvency more so.

    As equity shrinks from write-downs, the market shrinks from replacing it via rights issues. This time, I predict most RBS shareholders will take up their rights, albeit bleating and grumbling, leaving little for the underwriters to clean up.

    But at least RBS was in first. When Barclays wakes up it may be less simple. Recently, share prices have fallen rapidly when rights issues have been announced. And as monolines are down-rated, capital ratios will suffer.

    Banks must raise more equity to cover future write-downs and strengthen capital ratios. Sooner is always better than later.

    Vanity may obscure their vision but bankers will get over it. I would advise: no time for a belts and braces approach; ignore the sniggers, off with the coloured braces, tighten the belt, and go to market.

    Begging for billions.

  • Comment number 17.

    As someone who has worked in commercial insurance for nearly 20 years I am incredibly annoyed that the good name of our profession continues to get its name dragged through the mud by its association with other organisations such as banks and travel agents.

    Insurance professionals, and there are quite a few of us out there, are sick and tired of banks and travel agents ripping off the UK consumers when they sell insurance.

    It doesn't help that many of the people selling the products aren't insurance professionals and know nothing of the cover they are selling. This is why they sell travel insurance to people with pre existing health issues and don't ask them whether they have any such conditions and then when people try to claim they find they have no cover. Thankfully the FSA are finally closing that loophole for travel insurance.

    This is how it works, apologies for anyone who may be offended, but this is true.

    Historically the UK consumer has been very stupid regarding their finances.

    If you don't believe me just how many of you are still banking with the big four high street banks with current accounts paying 0.1% interest or similar when there are accounts paying 20 or 30 times that amount? The High Street banks make billions of pounds a year out of you.

    Payment Protection Insurance (PPI) and holiday travel insurance work on similar interia. People are too lazy to shop around.

    The market for both travel insurance and PPI are terribly skewed in that most people who want them buy them at the time of purchase of another good i.e. a holiday or getting a loan.

    As such the travel agents selling the holiday and the bank offering the loan effectively control most of the supply of people needing these covers. As such they demand very high commission rates from insurers who want to sell this cover because they have market power. With these high commissions the price is pushed up commensurately.

    I will make this very clear.

    IT IS NOT A CONDITION OF A HOLIDAY PURCHASE OR OF TAKING OUT A LOAN THAT YOU MUST BUY INSURANCE FROM THE SUPPLIER OF THE HOLIDAY OR LOAN.

    The biggest things people own i.e. their house and cars don't have to be insured by the building society or by the manufacturer. The same applies to these insurances.

    A simple internet search can easily find you a saving of anything up to two thirds on both your holiday cover or PPI cover and generally the cover available can be wider.

    Go to a local professional insurance broker if you don't want to or can't deal via the internet.

    Please people of Britain learn these simple lessons. It will save you loads of money and heartache.

  • Comment number 18.

    A simple remedy?

    If a legal entity puts a product on the market, then it should be illegal for the same entity to sell, or act as agent for the sale of, any insurance related to that product.

    Note that "putting on the market" has legal significance in EC legislation and it is a good deal wider than 'selling'

  • Comment number 19.

    Thank you Ian_the_chopper (17) for putting it all so clearly. I have never taken out PPI, Travel Insurance or so-called extended warranties because I am not a complete idiot and can count beyond ten. If millions of consumers in this country are so brain-dead as to take out these "products", then why should this concern anyone else? Being stupid is an expensive business, I'm afraid. And nobody ever lost money by underestimating the intelligence of the great British public.

  • Comment number 20.

    It looks like the cost of borrowing will be rising for many years to come.

    With rationing of Finance, and strict limits on borrowing.

    But still I see on television 0% purchase deals for everything from furniture to cars !

    Will people get used to doing without ?

    Will people get used to saving up if they can for anything they want to buy ?

    With pay cuts and unemployment on the Horizon for many people the next few years will be a lot poorer.

    And the Pensioners depending on Funds invested in Bank Shares (90% of Banks are owned by pension Funds) will get far less.


  • Comment number 21.

    @ #15

    Yes banks may now have to make profit like any other industry - by offering goods and services that consumers actually want at prices that suit a fair market.

    If a few overpaid and underbrained survivors of the old school tie system get to experince the cold winds of unemployment then it is about time.

    Consumers and more effective industries shouldn't be hobbled by the costs of shoring up the badly run larcenous banking industry.

    I have no objection to poeple achieving wealth but lets try and set up our system so they have to EARN that wealth not just 'create' it.

  • Comment number 22.

    A significant point so far ignored by most commentators is that Banks sell credit insurance to protect their own loan books. Although they adopt a high moral stance when selling the product ' you wouldn't want someone else to have to take responsibility for the loan if you were unable to pay it back...', actually every sale they make means that they have no risk exposure on the loan.
    Plainly, this risk-free position ought to be reflected in the interest rate the customer pays, but of course it is not. The result of this transaction is that the Bank charges a higher interest rate that can possibly be justified and, as it owns the Insurance company, it also makes a substantial profit on the Credit Insurance as a stand-alone product.
    It is as close to the perfect scam as it is possible to get without actually going to prison.

  • Comment number 23.

    The only insurance you ever really need are the legally required ones, ie your car insurance, and having home buildings insurance is probably essential. As is maybe medical/travel insurance to some other countries.
    Most other insurance is generally a waste of money. Paying say a 1000 quid to insure a 5k loan is just plain stupid. As is paying 400 quid to insure your new leather suite!
    Especially when you read the small print and find out youve only an average 75% chance of a successful claim.

  • Comment number 24.

    A cautionary tale. The misinformation and vague explanations given by banks and lending companies regarding protection insurance is truly an art form of some skill.
    Despite having some financial savvy, I took out a personal loan with a reputable lender(?) and decided to go for payment protection insurance. What a mistake. How many people realise that if you do this, the cost of the insurance is added to the total cost of the loan for the entire period and none of it is then refundable. By not paying attention or asking the right questions it added nearly £2000 to the cost of the loan, with interest calculated on the total amount. Worst of all, when I came to settle the loan early, I received no refund on the unused portion of insurance. A total rip off. Paying for something you never received. Despite complaints of mis-selling I got nowhere. The moral of the tale. Borrow from my high street bank and get a fully flexible loan at a slightly higher rate, I'd have beeen quids in!!!!

  • Comment number 25.

    My son had a loan from HSBC approximatly 4yrs ago. He was self employed as a football coach. He was never told that he didn't have to take our Insurance protection on this loan. HSBC Sold him the Insurance of £8,000. When he was out of work he was uable to claim. He was paying back £100 per month on top of his loan payment. Can he claim this back??

 

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