Purpose of Payment Protection Insurance - Case Study Example

PAYMENT PROTECTION INSURANCE Name: Course Instructor’s name Institution Date Payment Protection Insurance Payment Protection Insurance is a product that enables the consumers to insure loan repayment. The borrower may be unable to repay due to various reasons such as death, sudden illness and disability, loss of employment or any other cause of inability to earn income to service the debt. Banks and other credit institutions are the leading institutions in the selling of payment protection insurance; they succeed to do this as they sell it as an add-on to the loan or overdraft product. The general purpose of payment protection insurance is to enable one to repay a loan even when the borrower is faced with financial constrains. Furthermore, it helps the borrower when they are unable to repay. If the borrower has the PPI, the credit rating is not affected as the insurance can continue servicing the loan (Wilson, 2012). In the United Kingdom many cases of the miss-selling of the insurance have been reported in the past years.PPI is termed to be miss-sold if the borrower of the loan is drawn into the insurance without his/her consent. The credit institutions achieve their mission of miss-selling the insurance through different ways. First, the banks or credit providers cite the PPI as one of the elements of getting a loan due to the fear of losing the loan. The borrower agrees without adequate understanding about the insurance. Other reported cases are that; whenever a borrower agrees to have the insurance little or no education is offered in relation to when the insurance may benefit him/her. Another way of miss-selling the policy is when companies develop sales scripts which guides sales people to say that the loan is protected without mentioning the nature or cost of insurance. Mis-selling is also done by third party brokers. However, borrowers can always apply to claim for refunds (Peston, 2009). In the UK market the PPI was introduced around 1990. The main objective was to repay people’s borrowings if their income fell due to illnesses or loss of jobs. PPI became increasingly common place in around 2000; this was due to the high profits that were realized out of the product. Banks and other institutions started offering sales incentives designed to increase the take up of PPI by the banking customers. Unfortunately, the incentives resulted into a number of mis-selling practices. To start with, most banks added PPI policies to loans, without the customers’ consent or knowledge. Next, the institutions started pressurizing customers into signing PPI with the reason of securing their loans. However, the financial institutions failed to clarify to their customers that PPI was optional (Wilson, 2012). In the year 2004, several consumers started complaining over the money they paid to PPI. Consequently, the customers sought compensations from the respective financial institutions (Peston, 2009). It was discovered that most of the banks returned only around 15% to the customers who claimed for compensation. Barclays and HBOS were shown earning a lot of profits from the Payment Protection Insurance. This caused an investigation from Liberal Democrat Treasury spokesman over the inflated premiums and anticompetitive behavior (McGagh, 2016). In the year 2005, shortcomings of the PPI were shortlisted. It was discovered that PPI was expensive. Its premiums added up to around 20% to the original loan and the percentage could increase in the worst cases. Furthermore, PPI proved ineffective in different ways. First PPI was designed to limit the payout in case of genuine sickness. The policy was either introduces without the customer’s knowledge or sold to those who are not in a position of claim due to self employment. The Insurance was inefficient in that the claimants faced lengthy delays or faced complicated claims procedures what made them to them to stop the claims (Peston, 2009). The issuance of PPI still brought some debate in terms of regulations which dictated on who was eligible to be issued with the insurance (Peston, 2009). The initially, the policy stated that for one to qualify for the insurance, the customer should be between 18 to 65 years at the time they take the policy out. Sometimes the policy further stated that a customer should not exceed a certain age at the end of the policy term. The policy also required that the consumer to be working for a certain minimum number of hours a week at the time they take the policy. At times the policy may not be specific it may indicate that the customer just should be working at the time they take the policy (Maundrell, 2008).Moreover, where there was a resident criterion ,a customer was required to reside in a certain country by the time he/she is taking the policy. When the customers to whom the PPI was mis-sold filed their claims, employed the policies to ascertain their eligibility by the time they signed the PPI. This was helpful in identifying those to be refunded (McGagh, 2016). Retail banking was also affected by the introduction of PPI. The accumulated profits benefitted the banks. There was an outcry to make changes in the banking industry. There was the need for increase in competition, abolition of aggressive sales incentives and improvement of public trust in banks. The retail banking has always remained concentrated (McGagh, 2016). Most banks have established market shares and there are small building societies with very limited market shares. There have been policies to curb he problem of having a few companies conducting majority of the business in the UK. Most banks in the UK are progressing to stability in financial footing. Most banks have tried to realize an improvement in their balance sheets. However, there are no standardized surveys of employment practices or employee satisfaction levels (Maundrell, 2008). In 2005, The Financial Service Authority took over the task of regulating the general insurance industry. It essentially singled out PPI as one of its priorities. At the end it wrote to the Britain banks about the issue. The FSA started by imposing fines to the banks and lending institutions. For instance, Regency Mortgage Corporation, Liverpool Victoria Banking Services and many others were fined for adding PPI to many customers without their knowledge .Alliance and Leicester were fined for training their staff to put pressure on customers who questioned why the PPI was included in their quotation. Single premium, the worst type of PPI, was banned in 2009. It was mainly sold to mortgage-buyers (Financial Ombudsman Service ) The compensation battle began when a number of consumers tried to claim compensation from their financial providers. Numerous factors were taken into consideration for the eligibility of their claims. For instance, whether the customer was out of work when the policy was bought or whether the bank provided the right paperwork (Martin, 2006). Some banks that had miss-sold the PPI early dejected almost all compensation claims; the customers took their case to the industry Ombudsman after they undeterred and they were victorious (Gerard, 1989). The FSA brought in a new regime for PPI sales which stated new policies to govern the issuing of the PPI. This was to curb the problem of miss-selling the Payment Protection Insurance. Some policies were set up. FSA stated that the banks and other lending institutions should not sell PPI until at least seven days after the loan was agreed between the bank and the customer this was meant to hinder those lending institutions that sold the PPI along with the time of issuance of loans and mortgages (Martin, 2006). Secondly, it also set a policy that stated that the borrowers were to be given a given quote that detailed costs and cover this was to deter lending institutions from miss-selling of the insurance to customers without their knowledge. Moreover, FSA applied other approaches in addressing the issue (Gerard, 1989). This happened when the single premium PPI policy was miss-sold to the consumer and still remained in force. The FSA expected the banks to use the new set of rules retrospectively which the banks and other financial lenders institutions felt that it was unfair on their side. The new set of rules from FSA forced the banks to reopen many claims for PPI miss-selling in order to find customers who genuinely deserved compensation (McGagh, 2016). In conclusion, UK has undergone some changes concerning the selling of the PPI, this has come about following a number of criticisms from the widespread sale culture, and all the larger banks have changed the ways of selling the insurances (Gerard, 1989). Moreover the smaller banks have developed and extended culture that focus more on customers rather than profiting the banks. In order to curb the problem of miss-selling the insurance to the unwilling customers, UK should do regular checks to ensure the new policies are followed. Secondly, UK can ensure accessibility of terms and conditions of the policies to the customers, this can be achieved by hiring people to inform the customers before buying the PPI or better still put the information in the internet for easier accessibility (Maundrell, 2008). References "Annual review 2009/2010 - what the complaints were about". Financial Ombudsman Service. Retrieved february 25, 2016. Gerard Soong (Jan 22, 1989). "Protection Against Losses Due To Debts". New Straits Times (10). Retrieved 17 February 2016. "How to claim for mis-sold PPI". FSA.gov.uk. Retrieved 17 February 2016. "Law firm slams Central Bank's 'reckless' advice on PPI claims". breakingnews.ie. 8 October 2012. Martin (2006-04-04). "Over-sold, over-priced?". OpenLearn. Open University. Maundrell, Hannah (June 2008). "Do You Really Need PPI?". money.co.uk. McGagh, Molly (2016-02-22). "PPI becomes most complained about product ever". Citywire Money. "Payment Protection Insurance Market Investigation Order" (PDF). Competition Commission (United Kingdom). 2016. Peston, Robert (2016-05-09). "Banking industry gives up on PPI mis-selling battle". BBC News. Retrieved 2013-10-24. Upton, Prestridge, Jeff (2009-04-11). "PPI price rise makes its critics' blood boil". The Daily Mail. Tutton, Peter; Hopwood Road, Francesca (2005-09-13). "Protection racket". Citizens Advice Bureau. Wilson, Harry (2012-02-25). "HSBC's provisions for PPI compensation rises to £745m". The Daily Telegraph. Read More