OFT to Investigate Debt Insurance

MONDAY, DECEMBER 12, 2005

Not long after it was reported that debt insurance was being ‘mis-sold’ by insurers and banks, the Office of Fair Trading (OFT) is to investigate the sale of loan insurance schemes in the UK.

In September, the Citizen’s Advice claimed that banks and insurers were ‘mis-selling’ loan payment protection insurance (PPI). PPI is intended to act as debt insurance for people who become unemployed or ill, and would otherwise be forced to default on their loan or credit card repayments; risking bankruptcy, or having to negotiate an Individual Voluntary Agreement (IVA) with their creditors.

The UK charity, Citizen’s Advice, claimed that PPI schemes were too expensive, increasing the cost of borrowing by up to 9% a year. For some, PPI was inappropriate because it did not cover them if they were off work with a bad back, or due to mental illness, for example. Other exclusions included arbitrary age limits, individuals on fixed-term contracts, and self-employed people. Citizen’s Advice also claimed that 85% of it’s clients had claimed unsuccessfully against their PPI. Other clients’ complaints included late payouts, to the extent that some policyholders were facing problems with debt collectors, or the threat of court action.

The sale of PPI is a £ 5 billion industry in the UK, regulated by the Financial Services Industry (FSI). A spokesman for the British Banking Association pointed out that they were working with strict rules set down by the FSI, and that it was up to prospective purchasers to check that the policy was appropriate for their needs.

Nonetheless, Citizen’s Advice have lodged a “super complaint” with the OFT. Under UK consumer law, the OFT is now obliged to act, and has announced it will investigate the industry in the new year. In it’s announcement, the OFT said it had already "identified a number of issues which point to the sector not working well for consumers". Furthermore the OFT said it was worried about a lack of choice for consumers, insufficient transparency, and the profits made by PPI sellers.

In the event that the OFT finds that there has been any transgressions in the sale of debt insurance schemes, the industry can ultimately be referred to the Competition Commission.