Mis-sold Payment Protection Insurance

Curbs on the sale of payment protection insurance proposed by the Competition Commission could result in more expensive loans, lenders have warned.

The policies cover debt repayments if a borrower cannot work because of accident, sickness or unemployment, but they have been widely mis-sold. To prevent the worst abuses, the Commission wants lenders to be prevented from contacting a customer about the insurance within 14 days of a credit agreement being signed. It also wants single-premium policies outlawed, and advertising made clearer.

Lenders gave warning that the proposed crackdown would force them to push up rates on loans because they would no longer be able to subsidise deals with profits earned from the insurance.

Payment protection is one of the last big moneyspinners for banks such as Lloyds TSB, Barclays and HBOS, and is worth an estimated £3.5 billion. A huge slice of the profit is expected to be lost if the proposals are approved.

Stephen Sklaroff, director-general of the Finance and Leasing Association, which represents lenders that sell the insurance, said: “Significantly fewer policies will be sold. That will inevitably have an effect on loan rates, possibly pushing up rates by several percentage points.”

That could force loan repayments to rise by more than £100 a year. A borrower seeking a £10,000 personal loan over five years, for example, can lock into a rate of 7.8 per cent with yourpersonalloan.co.uk, paying £200.54 a month. If rates were to jump two percentage points, to 9.8 per cent, repayments would rise to £209.46 a month – an extra £107.04 a year, or £535.20 over the five-year term.

The Competition Commission has been investigating payment protection insurance for nearly two years and estimates that 14 million consumers have been overcharged by £1.4 billion. A spokesman said: “Rates could go up as there is an element of cross-subsidy on personal loans, but that can’t justify us not dealing with the clear problems that we have found.”

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