Payment Protection Insurance

What's the situation?

Payment Protection Insurance (PPI) has hit the headlines in the past few years because it was found that banks mis-sold the cover to a large number of people.

The insurance is supposed to cover loan or credit card repayments if you can't pay, for instance, because illness or redundancy stops you from working. But banks were found guilty of selling the cover to people in circumstances, such as self-employment, which weren't suitable for the insurance. This meant they would never have been able to make a successful claim.

In effect, policies were worthless for many customers and a nifty way for the banks to turn a tidy profit. In some cases, customers didn't consent to policies that were simply added to repayment plans.

The racket was referred to the Competition Commission in 2007 and in 2009 was foiled by the Financial Services Authority (FSA) when the watchdog stopped companies selling PPI for unsecured loans altogether.

The banks then tried to avoid paying out compensation to those who had been mis-sold and stopped receiving complaints from customers in October 2010 pending the outcome of a High Court ruling. In April 2011, the banks relented when the High Court ruled they had acted unfairly and had to refund those who were mis-sold policies.

Most banks have now made staggering provisions for payouts in their company's reports and accounts - Lloyds Banking Group said it had put aside £3.2 billion for refunds - overall it's thought the banks will eventually pay out around £9 billion in claims.

Because of the huge number and backlog of complaints and people involved, banks were initially given extra time to deal with complaints. But from the beginning of 2012, banks were given eight weeks to look at and respond to complaints. 

Was I mis-sold?

If you have had, or currently have, PPI added to a loan or credit card repayment plan, check the terms and conditions to see if you would have been excluded from cover. 

If you were self-employed at the time of taking out PPI, it's likely you have been mis-sold, as most policies will rule you out from making a claim. If you also discover that you had PPI added to your product and didn't give your consent, or if you weren't told it was optional, you have grounds to make a complaint.

Banks have now started writing to people who could have been mis-sold and have not yet made a complaint, to make them aware of their situation. If you get such a letter, don't put off acting on it, because there are time limits for making a claim, and, besides, this is your money to which you are entitled to reclaim. The letter should outline the reasons you may have been mis-sold and how you can go about getting a refund.

The FSA told banks and other PPI firms that letters must be easy to understand, not contain jargon and make time limits clear. Martin Wheatley, FSA managing director, says: "Historically, response rates for these types of exercises are low - sometimes as low as one in ten. Therefore, if you receive a letter, it’s important to consider your PPI purchase carefully and if you feel you have been a victim of poor practice - please do respond to the firm."

Time limits

There are time limits on when you can make a PPI complaint: usually you have six years from when the policy was first taken out, or three years from being made aware that there could be reason to complain.

If you had PPI added to payment plans in 2006, you should act fast to make a complaint. But if you are only contacted this year about being mis-sold you could have up to another three years to act.

If you fall outside of the time limits, you can still complain, but the bank or company that sold the policy doesn't have to consider your case and can reject it.

How do I claim?

If you think that you have been mis-sold don't delay in claiming. Use our PPI calculator to see how much you could be entitled to claim back. If you have been unfairly sold a policy you are entitled to a refund of everything you paid towards your policy. You may also be entitled to statutory compensation – usually set at 8% of the amount refunded – to make up for the fact you didn't earn interest on your money or spend it elsewhere during the time you had the cover.

"If you don't know whether you've had PPI contact your bank or provider, and they will confirm if it was added to a loan or credit card."

You should first contact the company that you think has mis-sold to you. The Financial Ombudsman Service (FOS) has a useful online form which will help you put together all the information you need to make a claim that will be assessed as quickly as possible.   

If your claim is turned down, you can then take your case to the FOS. The watchdog will look at the facts and decide if you were unfairly sold a policy, if it rules in your favour your provider will be forced to pay out a refund.

But note that if you fall outside of the time limits above for making a claim, the FOS can also reject your case, which is why it's important to act as soon as possible.

Some claims handling companies are very persuasive and tell people they can make a PPI claim, even if they've never had the insurance. Don't believe a word: you can't claim a PPI refund if you've never had PPI.

If you don't know whether you've had PPI contact your bank or provider and they will confirm if was added to a loan or credit card.  The main disadvantage of using a claims handling firm to make a PPI claim is that they take a cut of your payout or you have to pay a fee for their service. Meanwhile, some people have found it difficult to contact the firm after they've taken a fee.

Don't pay to make a claim as you can easily do it yourself for free. Using a claims management company won't speed up the process, despite what they say.

Should I buy PPI?

PPI policies vary significantly and can also be known under other names, including: Accident, Sickness and Unemployment (ASU) policies, and Mortgage Payment Protection insurance (MPPI).  

However, the same principle remains: PPI is to cover loan or credit card repayments when illness or unemployment hinders your ability to pay. If you were in this situation, a PPI payout could throw a much-needed financial boost. 

However, some policies can be very restrictive and when trying to make a claim you could find it's very difficult. This is why it's important to understand terms and conditions before you buy. When buying online it can be easier to gloss over the small print - in this situation the provider isn't liable for mis-selling as it's your responsibility to read and agree to the small print.

As with all insurance, you should shop around and compare quotes to make sure you get the best value for money. It's often better value to buy a standalone policy, rather than adding cover from a lender to your repayment plan.

Things to check on your policy:

- How long will you have to wait before making a claim?

- How long will you be covered for?

- Will the amount you pay change over the term of the policy?

If in doubt, seek advice from an Independent Financial Adviser (IFA).

Another option, and arguably better than PPI, is income protection insurance, which provides a regular tax free ‘income’  if you can't work due to an accident or illness. You are unlikely to be covered for unemployment though, unless you specifically ask for it and the cover is offered by the firm.

An income protection policy may be the same price or cheaper than PPI. It will pay out a percentage of your salary, typically up to 70%, and the money can go towards day to day living costs and bills, rather than just covering one debt. Before buying protection policies, check what cover is provided by your employer to make sure you don't insure against something that is already covered.

If you need further help, phone the Financial Ombudsman Service on 0300 123 9 123 or 0800 023 4567, and also be sure to read our guide to credit card protection.