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Payment Protection Insurance — An Overview of The Biggest UK Financial Scandal

Payment Protection Insurance — an overview

What is Payment Protection Insurance?

Payment protection insurance (PPI) is a form of insurance offered by banks and many other financial institutions. It is  designed to cover monthly payments if you are unable to work for any reason. Many people are relieved that they purchased payment protection insurance after losing their job or becoming ill. However, many people purchased PPI policies that they didn’t need or were misled about what it would cover. These people may be eligible for a PPI refund.

How Does Payment Protection Insurance Work?

People purchase payment protection insurance to cover themselves if they face any problems that would make it difficult to keep up the monthly repayments on their finance agreements. PPI generally covers people that become sick or lose their jobs. They can use it to protect their credit agreement, avoid repossessions or foreclosures and avoid having accumulating interest.

Most consumers purchase payment protection insurance directly through their financial institution. However, they can also purchase it through an insurance company, which is often a lot cheaper.

The consumer’s repayments will be covered while they are sick or unemployed. Every PPI policy is different, however, so customers will need to review the terms carefully to know if they will receive coverage and if it will be beneficial for them.

Is Payment Protection Insurance Beneficial?

You are not legally required to purchase payment protection insurance (PPI). Many people don’t need it, but many can benefit from it. It can be a good way to hedge risk if there is a possibility of being unable to make repayments in the future. However, it may not be worthwhile if your job offers a generous severance package, provides sufficient sick leave or you have enough savings to pay off your debts for a while.

Limitations of Payment Protection Insurance

Payment protection insurance is beneficial for some people in certain situations, but there are also drawbacks you need to be aware of. Here are some of the situations where you will not receive coverage under most PPI policies:

  • You cannot receive a PPI policy if you are not currently working
  • Payment protection insurance won’t cover you if you are self-employed
  • You generally won’t be covered if you can’t work due to stress or a pre-existing condition at the time that you took out the insurance

These are general guidelines, so you should check your policy for precise details as they apply to you. Every insurance company underwrites policies a little differently, so it is a good idea to verify the terms before taking one out.

It is also important to realise that it takes time for your coverage to take effect. You will need to have some savings to hold you over while waiting for the policy to kick in. Once again, you should check the terms of your policy to learn more.

Why Payment Protection Insurance Became a Scandal

PPI is a valid type of insurance for many people, but many financial institutions sold it simply to boost their profits. Here are some ways that banks mis-sold PPI to customers that didn’t need it:

  • They charged consumers for PPI without notifying them.
  • They misled customers about what their policy would cover.
  • They sold PPI to people that weren’t eligible for coverage in the first place.
  • They denied coverage to people that filed claims.
  • They prevented customers from cancelling their policies or told them that PPI was a requirement.

The Financial Services Authority estimates that about 16 million people have filed PPI claims since 2005. The nation’s banks have been forced to pay compensation to millions of customers. They are setting aside more money for future claims.

How Customers Receive Refunds for Mis-sold PPI

Customers that were mis-sold payment protection insurance are entitled to refunds. You will receive compensation for premiums that you paid over the years and interest on those premiums. The interest can be significantly greater than the premiums.

The FOS requires banks to pay 8% interest on all PPI payments made since 1993, and 15% interest on PPI premiums paid prior to that. The interest will not be compounded.

The Financial Ombudsman will take longer to issue a decision, because the review process tends to be more involved. There are two different ways that the FOS will handle the process:

  • Restructuring the loan. The FOS will require the bank to restructure the loan, if it is still ongoing. The FOS will need to determine the difference between the total amount that the customer paid and the amount that they would have paid if the customer hadn’t taken out PPI.
  • Order refund. The FOS will instruct the bank to issue a refund to the customer. The process should take between two to eight weeks, but tends to vary between banks.

You should file a claim directly through your financial institution in the first instance and if you receive an unsatisfactory conclusion, you can then take your case to the Financial Ombudsman Service (FOS).

Expected Compensation for Payment Protection Insurance

Many customers have received compensation for mis-sold PPI policies, while others are still debating whether to file for a refund. Here are some facts that may help convince you:

  • A recent survey from ING found that the average successful PPI claimant received £2,600 (across the board).
  • Some customers have received very large refunds, sometimes as much as £50,000 or more (although this is less than typical and we’re not suggesting that you will receive that much).
  • The Financial Ombudsman often rules in favour of the customer when adjudicating appeals. During the first half of 2013, the FOS issued compensation to 56% of the people that filed claims and that figure is even higher for some of the High Street banks. For example, the FOS states that about 77% of Barclays customers that filed claims were awarded refunds.
  • While the payment protection insurance scandal has dragged on for years, many people are still winning claims against the large banks.

Keep in mind that every situation is different. You will want to review your information and find out if you are eligible for a PPI refund. You should check with your bank for more information, because the Consumer Credit Act requires financial institutions to provide information on payment protection insurance claims that they have filed.

It is always a good idea to do your due diligence before filing a claim. Before you begin, you will need to show paperwork regarding the terms of the loan and the premiums that you paid. Make sure that you have this information on hand to make the process go as efficiently as possible.