Challenges Undermining the Success of Payment Protection Insurance in the UK

Essay 2018 9 Pages

Business economics - Banking, Stock Exchanges, Insurance, Accounting


Table of contents


Nature of PPI and Limitations

The Process Lenders Adopted Over the Last 20 Years in Providing Customers with PPI

The Controversy in the UK Regarding the Provision of PPI




Payment Protection Insurance (PPI) is a form of payment to customers that acts as a cover for the monthly repayments of loans owned to them by financial institutions such as the banks and insurance firms in situations when the customer becomes unemployed, falls sick or dies or even in case of an accident. Over the years, PPI has attracted increasing debate especially in the UK market following various concerns such as mis-sold products to customers who took loans. This concern led to some of the financial institutions in UK including HSBC to stop the progress of selling PPI in most of its branches in 2007, including personal loan protection plan, small business loan protection, cardholder repayment loan, mortgage repayment protection, and flexiloan repayment protection (Financial Ombudsman Service. 2011). As such, the main objective of this report is to understand the concept of PPI, explore the process lenders have adopted over the last 20 years in providing customers with PPI, and the controversy which evolved in the UK regarding the provision of PPI from a consumer, regulation and retail perspectives.

Nature of PPI and Limitations

There are certain limitation and terms of sale of the PPI which have led to increasing concerns over their potential value for money during the provided cover. For instance, the PPI premiums have attracted increasing debate in the market because of increasing the total cost of the policy to the customer (Georgosouli, 2011). PPI premiums in this case are normally charged on monthly basis so as to cover the cost of the policy or the full PPI premium is usually added to the loan up-front with the core intention of covering the cost of the policy (commonly referred to as Single Premium Policy). With this particular approach, most of the financial analysts argue that the money used to pay for the insurance policy is borrowed from the provider and it comes with additional interest passed to the consumer. As a result, to total cost of the policy is increased at the expense of the consumer. There is also the limitation of varying price of PPI depending on the lender, and this has an impact on the consumer (Financial Ombudsman Service. 2011).

Moreover, there are a number of obstinate problems of financial products mis-selling in the UK which forced most of the firms to stop selling their PPI. It is argued that PPI can sometimes be a very useful form of insurance but concerns are on the PPI policies whereby several have been mis-sold alongside mortgages, credit cards, and loans thus leaving the consumer who is the borrower with non-useful PPI when making claims. However, borrowers can reclaim for the PPI plus the statutory interest charges through a claims management company or a solicitor, and the process can sometimes be costly to the consumer (Adrian, 2014).

The Process Lenders Adopted Over the Last 20 Years in Providing Customers with PPI

In the last twenty years, most of the PPI policies were not sought out by customers, and this was the main reason why most of the customers claimed that they were unaware that they had insurance. PPI products were promoted based on commissions with minimal attention on the suitability of the product in the market (John, 2010). The PPI was designated to cover repayment on credit cards, mortgages, and loans with majority of credit card and loan companies selling these products at the same time. Reports show that by 2008, approximately 20 million PPI policies were in existence in the UK. However, with the growth of PPI product in the market, PPI was later mis-sold with most of the complaints being mishandled by providers, banks, and third parties in a large scale for at least a decade. The sale of the PPI policies was encouraged by large commissions thus making the provider/banks more profitable. Sales representatives were used to convince customers that the loan was protected without having to mention the cost of the insurance or its nature. The end result was the controversy of PPI mis-selling (Georgosouli, 2010).

The Controversy in the UK Regarding the Provision of PPI

Mis-selling of PPI in the UK is one of the major controversies from consumers, regulation, and retail providers. Mis-selling is a concept that has been used to mean the sale of unsuitable products thus putting customers in a disadvantageous position as a result of misleading product literature, bundles sales of products, pushing of a product by sales representatives, and marketing aimed at pensioners (Adrian, 2014). The mis-selling of PPI in UK accelerated in 2000s fueled by a number of factors including incentive structure and bundling with other products including mortgages, loans and credit cards, lack of adequate and quality information given to consumers regarding the design of the product in the market for instance, commission disclosure, how to reduce paid premiums associated with excess or differed payments, eligibility to claim using the policy being sold, cancellation rights, and fees disclosure. Other prominent causes include poor staff training such as poor customer service and a negative attitude towards consumer complaints on unsuccessful claims, inadequate suitability checks, and pressure selling (Adrian, 2014).

The regulatory authorities failed to detect the mis-selling of PPI thus failing to tackle it on time before it became a major scandal in the UK. The regulatory failed because of the difficulties to compare with similar products in the market. For instance, bundling, exotic naming, and product complexity made it more difficult for the regulators and customers to make comparisons with similar products in the market thus breaching control routines (Georgosouli, 2010).

To deal with the PPI mis-selling scandal, key regulatory and supervisory approaches were applied by the financial regulators as part of a strategy to end the mis-selling of PPI in the market. Some of the regulatory solutions used include prohibiting financial advisors from receiving commissions, but rather charge the customer directly, the financial advisors to be more qualified ( minimum qualification is a university degree), and Financial Services Authority (FSA) to enhance its use of mystery shopping (John, 2010). The industry solutions include customer orientation on product design, sales and marketing, and documentation, enhancing the monitoring of sales force including separate customer follow-up which would help in detecting improper sales practices, strengthening control functions on new product approval, enhanced checks of product literature, enhancing transparency which is key, and changing incentive structure so as to put less focus on short-term sales such as claw-backs (Georgosouli, 2011).

FSA stated that the use of stronger actions could have detected and responded to PPI mis-selling earlier, and as a result supervisory approaches have been used to identify and also respond towards PPI mis-selling risks in the UK market. For instance, the Financial Conduct Authority (FCA) supervisors use several tools to detect mis-selling such as the social media, mystery shopping exercises, and consumer groups (Georgosouli, 2011). The use of a wide range of information from these groups, therefore, helps in identifying PPI risks such as systemic risks which could lead into another PPI scandal in the future. FCA also has the power to remove any product in the market if they suspect that it will have detrimental effects to the customers. An example is the stopping of the sale of contingent convertible securities especially to retail customers in 2014. FCA argued that the stopping of this product saved customers from losing their investments ranging between £16 million to £ 235 million (John, 2010).



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challenges undermining success payment protection insurance



Title: Challenges Undermining the Success of Payment Protection Insurance in the UK