Key Facts

Here are some important facts and information about payment protection insurance that you may not know:

The Financial Services Authority estimate that over 16 million payment protection insurance policies have been sold since 2005 and that around £17 billion of premiums have been paid by borrowers. The major high street banks have set aside over £5billion to compensate people for mis-sold payment protection insurance.

The Financial Ombudsman Service handled nearly 50,000 complaints about the mis-selling of payment protection insurance in the year to April 2010 and upheld nearly 90% of these in favour of customers.

Following an investigation by the Competition Commission, the sale of some types of payment protection insurance where the cost of the insurance is added to the amount you borrow has been banned completely.

The Competition Commission have also banned the sale of all types of payment protection insurance at the same time as the loan is arranged. Lenders have to wait at least a week before they try to sell payment protection insurance.

According to the Competition Commission, lenders were receiving up to 80% of the premium you pay for the payment protection insurance as commission. So if you paid a premium of £5,000 up to £4,000 of that was going straight back to the lender as commission for selling the policy.

Some lenders also received all or a proportion of any profits made on the insurance claims fund, i.e. if the value of claims turned out to be lower than expected, the lender earned more money. Therefore the lower the amount of successful claims made on the payment protection insurance policies sold by the lenders, the more money the lenders made.

The Financial Services Authority estimate that there will be over 500,000 new complaints per year for the next five years about the mis-selling of payment protection insurance and the total cost of compensating borrowers will be over £3 billion.

The Financial Services Authority has also taken action against 24 firms and individuals for payment protection insurance failings with fines totaling approximately £13 million.

For longer term loans, where the premium for the payment protection insurance was added to the amount borrowed, the cost of the policy (including the interest paid) could exceed any benefits you would receive under the policy.

As the payment protection insurance was stated on the loan document to be “optional”, the cost of the insurance was not included in the calculation of the APR (the interest rate that lenders have to quote in advertisements by law so that borrowers can compare the costs of different loans). This made the APR appear much lower.