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ombudsman news

issue 71

August 2008

complaints about payment protection insurance

This year we have been receiving significant numbers of complaints about the sale of payment protection insurance. Sometimes called "loan protection" or abbreviated as "PPI", this type of insurance covers loan or debt repayments in certain circumstances, for example if the policyholder is unable to work because of illness or if they are made redundant. How these policies work - and the range of benefits they offer - can vary considerably from policy to policy.

This selection of recent case studies indicates the approach we are likely to take when considering individual complaints about the sale of payment protection policies.

As we explained in our annual review for 2007/08 (published in May this year), when considering complaints about payment protection insurance we continue to apply our long-standing approach to the sale of insurance products. The complaints we have settled have raised very few new issues. Applying the standards set by the law, by good industry practice since the 1990s, and in recent times by the FSA, enabled us to be clear about the approach we take to the selling of insurance - and to follow this approach consistently in these cases.

As the cases show, the details of the particular policies sold, and the sales practices of the businesses concerned, can make a significant difference to the outcomes of these cases - as can the circumstances of the individual customer.

issue 71 index of case studies

  • 71/1- customer says he was never told that a payment protection policy was optional when he took out a credit card
  • 71/2 - couple in financial difficulties take out a succession of loans and are sold a new single-premium payment protection policy each time, adding to their outstanding debt
  • 71/3 - consumer says he was not told his payment protection policy offered only limited benefits to the self-employed
  • 71/4 - consumer in financial difficulties complains about sale of a payment protection policy that she considered unsuitable for her needs and too expensive
  • 71/5 - consumer complains about sale of payment protection policy after he repays his loan early and gets only a partial refund of the amount he paid for the policy
  • 71/6 - insurer suspends payment of unemployment benefit under payment protection policy, saying there was insufficient proof he was looking for work

71/01
customer says he was never told that a payment protection policy was optional when he took out a credit card

A trainee chef, Mr A, complained about the way in which he was sold a payment protection policy when he applied for a credit card. He said he had understood he was being insured, but had not been told that the policy was optional.

He said he was not given any information about the cost or benefits of the policy. And he stated that a representative of the credit card company had simply filled in the application form for him, written a small "x" at the bottom of the form, and then asked him to sign his name next to the "x".

The credit card company rejected his complaint. It said it was clear from the application form that the insurance policy was optional and that Mr A had chosen to take it. The company also said that the insurance premiums were itemised on Mr A's credit card statement each month, so he must have been aware that he was paying for an additional - optional - product.

complaint upheld
We asked the credit card company to send us Mr A's application form. We noted that on the final page, close to the space for the customer's signature, there was a "tick box" next to a statement that the customer wanted payment protection insurance. This had been ticked.

The tick in the box, the written details entered on the form, and the small "x" placed next to the signature all appeared to have been written in the same handwriting, using a ballpoint pen. However, the signature itself looked markedly different and had been written with a thick, felt-tipped pen. This tended to support Mr A's account of events.

We also noted that Mr A had been 19 years of age at the time of the sale. This was the first time he had applied for any financial product or service other than a basic bank account.

We did not agree with the credit card company that it was clear from the application form that the insurance cover was optional. Nor did we agree that, by signing the form, Mr A had clearly indicated his wish to buy the policy. There was no evidence that he had been told anything about the cover at the time of the sale. And the fact that Mr A's statement showed that the premium was collected monthly did not mean he must have been aware the insurance was optional.

We upheld the complaint and told the company to return to Mr A all the premiums he had paid to date, plus interest.

71/02
couple in financial difficulties take out a succession of loans and are sold a new single-premium payment protection policy each time, adding to their outstanding debt

Mr and Mrs J had been experiencing financial difficulties for some while and their situation worsened in early 2005, after Mrs J gave up work to look after their children. Finding it difficult to meet the monthly repayments on their loan, they approached a different lender to see if it could help.

The lender offered them a new loan of £18,000. This allowed them not only to settle their existing loan (for around £11,000) but also to clear the overdraft on their current account and settle several credit card debts and sizeable bills. In order to keep their monthly repayments as low as possible, the couple chose to take the new loan over 10 years.

Unfortunately, Mr and Mrs J's financial problems did not resolve themselves and within 18 months they again approached the lender for help. It agreed a new and higher loan. This was spread over 15 years and was secured by a second mortgage on the couple's home.

Some time later, a friend pointed out to them that each time they had obtained a new loan they had also been sold a new payment protection policy. So they asked the lender if it would refund their insurance premiums, as part of a wider settlement of their continuing debt problems. The lender said it would arrange a small, partial refund if the couple cancelled their policy. Unhappy with this, the couple referred their dispute to us.

complaint upheld
We noted that each time Mr and Mrs J had taken out a loan they had been asked to pay for the insurance by means of a single premium. This was added to the underlying loan and repaid (plus interest) over the entire length of the loan, even though - in each case - the policy itself only provided cover for 5 years.

There was nothing to suggest that the lender had explained to Mr and Mrs J the significance of this arrangement - particularly the fact that that they would still be paying for the policy for some time after the cover had ended.

Although the lender told us it did not offer advice, it was clear that it had actively encouraged the couple to buy the policies. In view of the couple's financial circumstances, we did not consider the sale of these policies to have been appropriate.

Flexibility was an important consideration, as it seemed likely the couple would need to restructure the loan at a later date. They would not wish to incur significant costs in doing this.

However, the policies they were sold lacked flexibility and, because of the limitations on the refund of premiums, were particularly costly if they were cancelled after a relatively short period.

In our view, the lender should not have encouraged the couple to buy these policies, and the couple would not have wanted the policies if the business had explained matters more fully.

We said the lender should re-calculate the amount outstanding on the couple's loan account, putting them in the position they would have been in if they had not bought the policies. We said the business should also pay the couple back the amount they had paid for the policies, plus interest on these amounts.

We had some concerns about the way in which the lender had dealt with Mr and Mrs J, given their overall financial difficulties. We therefore suggested it should look at ways of assisting them with a wider settlement of the debt, including waiving the fees it had levied in recent months in connection with several overdue loan repayments.

71/03
consumer says he was not told his payment protection policy offered only limited benefits to the self-employed

Mr D had a small shop specialising in interior design. His complaint concerned the single-premium payment protection policy he had been sold when he took out a personal loan. He thought the business concerned should have realised the policy was unsuitable for him, as he was self-employed and therefore entitled to only a limited number of benefits under the policy.

When the business refused to refund all the premiums he had paid, plus interest, Mr D brought his complaint to us.

complaint upheld
We noted that the benefits available to self-employed policyholders were more limited than those available to employees. In particular, the redundancy benefit was only available to policyholders if their employer had ceased trading or had been declared insolvent. We accepted Mr D's view that these terms were likely to make the policy less attractive to someone who was self-employed.

In this particular case, although the business clearly knew that Mr D was self-employed, it had not mentioned that this would limit the benefits he could get under the policy. The business had given him a written summary of the policy benefits. However, we did not consider that this leaflet adequately highlighted the limited cover he would get from the policy.

We concluded that the business had not given Mr D sufficient information to enable him to make an informed choice.

We upheld the complaint. We told the business to put the loan back where it would have been if he had not taken the policy, and to refund all of his payments for the policy, with interest.

71/04
consumer in financial difficulties complains about sale of a payment protection policy that she considered unsuitable for her needs and too expensive

Miss A did not earn a great deal from her job in a local bookshop and as well as having a large overdraft, she was close to her spending limit on several credit cards. Despite this, she felt she had been managing her finances reasonably well.

After she split up with her partner, however, she realised that she had become increasingly reliant on his help to meet the household bills and other expenses.

Alarmed by the extent of her financial difficulties, she applied to the business for a loan. It agreed a sum of £20,000, to be repaid over 15 years and secured by a second mortgage on Miss A's flat. The business also sold her a payment protection policy.

Some time later, Miss A complained about the sale of this policy, saying it was too expensive and she had never been told that it was optional.

complaint upheld
We had significant doubts about the sales practices of the business concerned. However, we accepted that the business might reasonably have believed Miss A had a need for a payment protection policy. And we thought Miss A should have been aware, from the written information she was given, that the policy was optional. However, the business only offered its loan customers one type of payment protection policy - and we did not think that particular policy was suitable in this case.

Moreover, despite being well aware that Miss A needed to reduce her outgoings, the business had effectively understated the true cost of the policy. It had not explained exactly how much she would pay for it, but had simply told her that the premiums would "increase the monthly payments by only £47 a month". The policy offered cover for five years and had a single premium of over £5,000.

This sum was added to the loan and spread over the loan's 15-year lifetime, plus interest. Miss A was therefore paying a total of nearly £8,500 for the policy.

We looked at the restrictions placed on the sickness and unemployment benefits available under the policy. If a policyholder made a successful claim, their loan payments would be covered for up to 12 months.But the policyholder would then need to have returned to work for a minimum of three months before they could make any subsequent claim.

We calculated that in order to recoup the total amount she was paying for the policy, Miss A would need to make three separate claims, each for 12 months' worth of benefits, during the five years that the policy was in operation.

The business disputed our calculations, pointing out that there was no limit on the number of claims that could be made. It also noted that we had not taken account of the death benefit, which would pay off the loan in full if Miss A died while the policy was in force.

However, we said the policy was expensive and inflexible and we remained unconvinced that it had been suitable for Miss A. If she had needed life cover, she could have obtained it at a very modest cost.

We thought it unlikely that, in practice, the value of any benefit payments she received from the policy would exceed the amount she was paying. We told the business to put Miss A's loan back as it would have been without the payment protection policy. We said it should refund all the payments she had made for the borrowing on the policy premiums - and pay her a modest sum for distress and inconvenience.

71/05
consumer complains about sale of payment protection policy after he repays his loan early and gets only a partial refund of the amount he paid for the policy

Mr K applied to the business for a loan so that he could buy a car for his daughter, who had just started at university. His finances were under some pressure at the time. Not only was he committed to paying part of his daughter's course fees, but the firm he worked for had recently made significant cut-backs in its bonus payments. For some while, Mr K had relied on these payments as a very welcome supplement to his income.

The business arranged to lend him the sum he needed, over 30 months. It also offered him a payment protection policy, covering the same period as the loan. Mr K paid for the policy with a single premium and the cost was added to the loan.

Unfortunately, Mr K's daughter found it difficult to settle at university and after six months she gave up her course and took a temporary job abroad. So Mr K asked the business if he could settle his loan early and cancel the policy.

Surprised to learn that only a very small proportion of the premium he had paid would be refunded to him, Mr K complained to the business. He said it should not have sold him an expensive policy that he did not need - and that represented very poor value for money.

complaint not upheld
The evidence suggested that Mr K had been given adequate opportunity at the time of the sale to consider the details of the policy. The literature set out the policy's key features - and its costs - very clearly.

We did not think the literature explained the conditions regarding the refund of premiums as well as it should have done. But in view of his circumstances at the time of the sale, we thought that however clearly these conditions had been stated, Mr K would still have bought the policy. He had a clear need for insurance to cover his loan repayments. The loan was for a modest amount and for a relatively short period. And Mr K had no particular need at the time to ensure the loan arrangement was flexible. We did not uphold the complaint.

71/06
insurer suspends payment of unemployment benefit under payment protection policy, saying there was insufficient proof he was looking for work

Mr B was made redundant from his engineering job at a local factory. He took some comfort from the fact that a year earlier, when he had taken a loan to buy a car, he had also taken a payment protection policy.

For five months Mr B received unemployment benefit under the policy, to cover his loan repayments. But the insurer then suspended his benefit. It expressed some surprise that he had not yet obtained employment, and said it needed proof that he was still actively looking for work before it could reinstate his payments.

Mr B complained to the insurer, saying that he attended the jobcentre every week and had also registered his details with an internet employment agency. He thought it unreasonable of the insurer to expect him to send written evidence of every job application he had made. It was rare for companies to acknowledge receipt of an application or to write to tell him if he was thought unsuitable.

The insurer then said it would be prepared to accept instead a letter from Mr B's jobcentre, confirming that he was actively seeking work. But when he provided this, the insurer wrote to tell him it was unable to pay him any further unemployment benefit, as there was insufficient proof that he was looking for work. Mr B then referred his complaint to us.

complaint upheld
We were not surprised that Mr B had been unable to obtain a new job immediately. His job had been fairly specialised and his skills were not readily transferable to other areas of work.

Neither were we surprised that Mr B had been unable to produce many letters acknowledging - or rejecting - his applications for particular jobs. It is relatively common these days for companies to contact only those job applicants who are shortlisted for an interview.

The insurer did not dispute that it had originally agreed to reinstate Mr B's benefit payments if he provided a letter from his jobcentre confirming that he was still looking for work. It was unable to explain why it had then gone back on its word. And we could see nothing in the terms and conditions of the policy that might justify its refusal to pay the unemployment benefit in this case.

We looked at the dates on the few letters of acknowledgment or rejection that Mr B had been able to supply - and checked these against the information provided by the jobcentre. We concluded that Mr B had been looking for work for a period of eight months from the date when the insurer had stopped paying him any benefits.

We said it should pay him the amount he had been entitled to under his policy during that period. We said it should also make a small additional payment in recognition of the inconvenience and distress it had caused.

 

image of ombudsman news

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.