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The Uncomfortable truth about unsecured credit: no policy, no loan.

-- The Uncomfortable truth about unsecured credit: no policy, no loan by NEVILL BOYD MAUNSELL

-- FSA fears consumer credit policing


True to form, MPs were full of sound and fury yesterday, calling on the Financial Services Authority "do something" about the supposed mis-selling of Personal Protection Insurance - the trade name for policies that pay off an unsecured loan if the borrower falls ill or becomes unemployed. Some blatant abuses were highlighted the other day – an elderly pensioner persuaded to buy a policy where the small print specifically ruled out claims by anybody over 65 and so on. Yesterday, it was pointed out that some of these policies are so expensive that they can more than double the cost of the loan.

That is deplorable. What nobody queries is how it is possible to sell such policies at all without mis-selling. They suffer from a built-in flaw. In the event of a claim the lender gets the money, not the borrower - but the borrower pays the premiums. There is nothing the FSA can "do" that will ever going to remove that basic conflict of interest. We are not talking about mortgages, where a borrower may well feel it is worth paying a (sometimes exorbitant) premium to reduce the risk of losing his home if things go wrong. Nor are we are talking about permanent health policies which provide an individual with an illpurpose income if he becomes unable to work - though the terms of these can be very tightly worded.

An unsecured loan is altogether different. It is the lender who is at risk. That is why it costs more than a mortgage. A borrower may well be persuaded that he is doing the prudent thing by taking out one of these policies and, in a sense, he is. He insures himself and his family against the persistent attentions of debt collectors, or, if the worst comes to the worst, the consequences of going bankrupt, though these are less dire nowadays than they were. But in terms of cold financial benefit there is nothing in it for him. So what should the FSA "do"? Ban these policies altogether? Well, some borrowers probably do value the peace of mind. Then would NatWest, for instance, really be offering unsecured credit at 7.4 per cent without the prospect of selling a highly priced insurance policy to some of the people who take it up? A website called uSwitch.com claimed yesterday that insurance could have the effect of raising the cost of one of those 7.4 per cent loans to 18.7 per cent.

If the FSA bans the insurance the credit will doubtless cost more for everyone. Or it could order a wealth warning to go on every application form alongside the space for the borrower's signature IF YOU MAKE A CLAIM. ON THIS POLICY, HOWEVER VALID, YOU WILL NEVER SEE A PENNY. ALL THE MONEY WILL GO STRAIGHT TO PAY OFF YOUR LOAN. And what difference will that make? Ask the tobacco companies. You can never prove it, but I suspect the uncomfortable truth is the same as it was with mortgage endowments. The sales person takes care not to say it, but the borrower gets the idea that he is not going to get the loan unless he buys the policy.

FSA fears consumer credit policing

The Financial Services Authority warned MPs yesterday that burdening the regulator with responsibility for policing consumer credit would risk swamping it altogether. Calls for the FSA to oversee consumer credit ranging from bank overdrafts and credit card borrowing have grown louder amid reports of ballooning unsecured debt and fast-rising numbers of personal bankruptcies. But yesterday the FSA's chairman, Sir Callum McCarthy, insisted to the Commons Treasury Select Committee that his organisation is not the right one for the job. Over the past year the FSA has extended its statutory functions to take on the regulation of mortgages and general insurance.

This brought 14,000 new firms under its wing - 90 per cent of them small enterprise rather than household names in banking and insurance. Sir Callum said: "Giving to the FSA responsibility for consumer credit would mean that we would have to take on another 100,000 licensees." Because the FSA would have to deal with teams of trading standards officers on the ground, it was "far from clear" that such a move was appropriate, Sir Callum added. His comments came as MPs voiced concerns that the FSA is struggling to communicate effectively and consumers were baffled by the array of financial products available. "Do you accept that at some point choice turns into confusion?" asked Susan Kramer, Liberal Democrat MP for Richmond Park.

Other MPs objected that the FSA seems to have reached only consumers who are already well-informed about financial products, leaving many more at risk. In the case of endowment mortgages, the FSA fears that hundreds of thousands of home-buyers may not have made any alternative arrangements if their policies fail to mature with a pay-out big enough to clear their mortgages. The FSA said it is pressing the need for action on financial firms and has leaflets available in places such as doctors' waiting rooms and Post Offices. MPs also raised the question of payment protection insurance , sold to borrowers taking out unsecured loans io cover their repayments if they fall ill or lose their jobs before the loan is paid off.

John McFall, the committee's chairman, accused the FSA of dragging its feet, failing to get tough with the way that financial services firms sell this insurance. "Something needs to be done urgently," he said. "It seems that this problem has gone on and on and nothing has been done about it." The FSA should "name and shame" firms believed to be over-charging customers or mis-selling these policies. Sir Callum agreed there was a major problem and the Office of Fair Trading had received a "super- complaint" from Citizens advice about the sale of PPL