New rules make it easier for loan and mortgage customers to claim premium refunds for payment protection insurance.
Thanks to new rules introduced by the financial watchdog, lenders will find it harder to fleece borrowers who buy insurance to protect their personal loan or mortgage repayments.
On Wednesday, the Financial Services Authority (FSA) announced that it had reached agreement with a number of trade associations to improve the fairness and transparency of refunds given to holders of payment protection insurance (PPI) policies.
PPI is optional insurance which covers your monthly repayments if you are unable to work due to an accident, sickness or unemployment, and pays off your loan if you die. As I explained in this article, although PPI policies appear to offer valuable protection, they are massively overpriced, poorly designed, frequently mis-sold, and difficult to claim against.
Although 99% of PPI policies are fundamentally flawed, lenders use high-pressure sales tactics to flog around seven million policies a year to unsuspecting borrowers. Worst of all are the 'single-premium' policies sold alongside personal loans and, to a lesser extent, mortgages. With these policies, the entire PPI premium is added to your loan as a lump sum and interest is charged on it.
Given that almost all customers would be better off with more flexible monthly premium policies, there's no excuse (other than blatant profiteering) for selling single-premium PPI. Indeed, the Fool has been criticising single-premium policies for more than four years, in hard-hitting articles such as Britain's Biggest Rip-off Gets Worse.
What's more, borrowers who later decide to cancel their single-premium PPI for whatever reason find it incredibly difficult to receive a refund relating to the unused element of their policy. Many lenders either offer pitiful refunds, or refuse to hand over any refund at all. Thanks to the FSA, this is set to change, with 'nil-refund' PPI policies to be outlawed.
Here are the full terms of the agreement between lenders and the regulator: firms should...
1. not include nil-refund terms in contracts with new customers;
2. not apply nil-refund terms in contracts with existing customers;
3. contact existing customers if their contracts contain nil-refund terms to inform them of how refunds will be dealt with in practice;
4. treat their customers fairly if they need to reissue the associated loan in order to cancel the PPI;
5. calculate the refund fairly, taking into account their reasonably incurred costs, which may or may not result in a pro-rata refund; and
6. include in new policies examples or a table to illustrate how refunds will be calculated to improve transparency.
So, if you've repaid a protected loan early in recent years, or cancelled a single-premium PPI policy for any reason, the door is now open for you to reclaim a fair refund of your premium, plus interest on top. Write to your lender with a copy of the FSA announcement and insist that it reviews your case. If it refuses to play ball, complain to the Financial Ombudsman Service, because you're sure to win judgment in your favour. Note that you're unlikely to receive any refund if you cancel your policy very close to its end, or if you have made a successful claim and been paid benefits.
Finally, speaking as someone who worked in the PPI industry for eleven years, I'm pleased by this move to improve consumer protection. However, I'd have liked to have seen the FSA go the whole hog by ordering lenders to pay pro-rata (proportionate) refunds on single-premium policies. In other words, if you cancel a policy halfway through its life, you get back half of the original premium paid.
Let's hope consumer groups and regulators keep up the pressure on PPI providers to do the right thing by their customers. We certainly will here at the Fool!
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