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Credit Card and Loan Insurance Changes

Banks have been using loan insurance and payment protection options to supposedly protect the individual holding the loan.  However, in recent months the Competition Commission has decided to proactively look at the way the insurance is sold for the loans and credit cards, in an attempt to hinder the large profits the banks and lenders have been making off of these options.

The commission has received several complaints regarding these options.  In fact a lot of the complaints have been about excessive pressure to buy the protection from the banks and lenders as the alternative would be losing access to the loans.

The consumer groups and Citizens Advice have also been looking into the billions of dollars these banks and lenders have been making.  It seems that these costs have affected a lot of the consumers to push them from the edge of poverty into poverty.  A person from the Citizens Advice Bureau spoke regarding their 2005 look at the issue.  According to this person the payment protection insurance is overly expensive and not correct for the consumers.  The company further stated that they are just ripping off the consumers.  Most consumers will never use the payment protection insurance they have been forced to buy.

Peter Davis, an inquiry chairman, stated that competition from banks is not enough to lower the cost of the payment protection as they are not regulated to keep it low.  They have huge profit margins regarding the sale of the insurance protection.  A study also showed that the payment protection insurance industry has made on an annual basis 1.4 billion pounds on sales of 3.4 billion pounds of insurance.  The point of the payment protection insurance is to cover consumers in the event they are unable to make their payments on mortgages, loans or credit cards.  In other words, if the consumer becomes ill or they lose their job for a bit of time the insurance is supposed to cover that.

Payment protection insurance is an additional cost to the loan or credit card.  About 20 percent of the individuals sold the insurance will actually use it.  The credit card PPI is only 11 percent for claims.

These overwhelmingly low numbers for actually using the insurance combined with the additional cost is why the commission feels they need to look into the whole process and offer up some type of remedy.  It seems the commission may ban some of the more expensive projects and review others to change their structure to make the overall policy a better one.

Barclay back in 2004 was examined.  It was found that Barclay was making 10 percent of their worldwide profits from their sales of payment protection insurance in the UK.  This research soon led to other banks being investigated and they were found to have about a 70 percent profit margin regarding the insurance.  Barclay moved its operations to Dublin and that meant they were able to make even more with the lower taxes, which is why the banks are being examined further.

Back To Financial News June 2008

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