How Does PPI Work in the UK?

Payment Protection Insurance (PPI) is an insurance product designed to cover loan repayments if the borrower is unable to make payments due to specific circumstances. In the UK, PPI has been a significant subject of regulatory and legal attention due to widespread mis-selling practices. This article provides a comprehensive overview of how PPI works, its key features, the issues related to its sale, and the compensation process.

Key Features of PPI

Coverage

PPI is typically sold alongside various credit products, including:

  • Loans
  • Credit Cards
  • Mortgages
  • Other Financing Options

The primary purpose of PPI is to ensure that borrowers can continue making repayments even if they encounter financial difficulties due to:

  • Illness
  • Injury
  • Redundancy
  • Death

Types of Payments

Depending on the policy, PPI can cover:

  • Some or all of the monthly repayments for a specified period.
  • The coverage duration and amount vary based on the policy’s terms and the circumstances that trigger a claim.

Premium Payment

The cost of PPI can be structured in several ways:

  • Single Premium: Included in the loan amount.
  • Monthly Premiums: Paid alongside regular loan repayments.
  • Credit Card Premiums: Calculated based on the outstanding balance each month.

Mis-Selling of PPI

Overview of Mis-Selling

The Financial Conduct Authority (FCA) has identified widespread mis-selling of PPI. Common issues include:

  • Lack of Consent: Many customers were sold PPI without explicit consent or were unaware of having a policy.
  • Pressure Sales Tactics: Some consumers were pressured into purchasing PPI as a condition for obtaining credit.
  • Inadequate Explanation: Policies were often not properly explained, leading customers to believe they needed coverage when they did not.
  • Unsuitable Policies: Customers were advised to take out PPI policies that did not suit their specific circumstances.
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Regulatory Action

The FCA has taken significant regulatory action to address the issues of PPI mis-selling, including setting up a compensation scheme for affected consumers.

Complaints and Compensation

Deadline for Complaints

The FCA established a complaint deadline of 29 August 2019 for consumers wishing to claim compensation for mis-sold PPI. After this date:

  • Most new claims are no longer accepted unless specific conditions apply (e.g., if the policy was purchased after the deadline).

Compensation Process

Consumers who believe they were mis-sold PPI can:

  1. File Complaints: Directly with the provider of the insurance.
  2. Escalate Complaints: To the Financial Ombudsman Service if they are dissatisfied with the provider’s response.

Total Compensation Paid

As of April 2021, over £38.3 billion had been paid in refunds to customers who claimed compensation for mis-sold PPI.

Ongoing Claims

While new claims are restricted post-deadline, consumers may still pursue legal action through courts if they have exceptional reasons for not claiming earlier.

Summary

Payment Protection Insurance (PPI) in the UK was designed to protect borrowers from defaulting on repayments due to unforeseen circumstances. However, its widespread mis-selling led to significant regulatory scrutiny and a substantial compensation scheme. Consumers affected by mis-sold PPI can seek redress through complaints and compensation processes established by the FCA, with substantial sums already paid out in refunds.

For anyone dealing with PPI or seeking further information, understanding these details is crucial for navigating the regulatory landscape and ensuring that their financial rights are protected.