The banks’ £4bn protection racket

After a record fine for an ‘extortionate’ loan protection scheme, customers are urged to claim back what they are owed

By Martin Hickman, Consumer Affairs Correspondent

Published: 17 January 2008

A new scandal is brewing in the personal finance industry that could dwarf the revolt against overdraft charges which has tarnished the reputation of the banks and won customer refunds of £1bn. As the Office of Fair Trading begins a court case against those bank charges, thousands of customers are seeking, and winning, refunds of premiums for payment protection insurance (PPI).

PPI is meant to cover mortgage, personal loan and credit card borrowers if they lose their jobs or fall ill but the policies are riddled with exemptions and are often considered a waste of money. Taking out a policy can add £3,000 to the cost of a £7,500 loan.

About £4bn of the £5bn paid in premiums annually is kept by the industry, making PPI the most lucrative form of insurance in the UK. According to the personal finance campaigner Martin Lewis, half of the 20 million policies currently in force may have been mis-sold, amounting to £10bn.

In a warning that it will no longer tolerate the industry’s failings, the Financial Services Authority yesterday imposed a record £1.1m fine on HFC Bank, which loans money to people with poor credit records. For two years to May 2007, HFC, a subsidiary of HSBC, sold PPI to 163,000 sub-prime customers, but its advisers failed to explain their recommendations or identify any of the many exemptions that would bar payments if they claimed through illness or redundancy.

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