Banks and credit card companies keep secret how much money they make from selling insurance to cover loan repayments. Leaf through the Barclays annual report and you will find no mention of the product that is widely believed to account for at least 10% of its profits. Analysts at investment bank Credit Suisse First Boston said earlier this year they believed Barclays, along with several other banks including Lloyds TSB, were making at least £1 in every £10 of their UK profits from selling the insurance.
Profit margins reached 75%. The report confirmed an earlier investigation by the Guardian, which revealed Barclays made £240m profit on a turnover of £350m in 2001 from its payment protection insurance (PPI) business. Confidential documents also revealed the bank ran the PPI business from Dublin to save tax, and senior staff, worried about accusations of profiteering, attended regular meetings with other banks to discuss how to avoid adverse publicity.
The annual accounts for Barclays subsidiary Firstplus also make no mention of PPI. What they do show is that selling secured loans with interest rates of up to 20% - and with expensive PPI cover added on top — is a hugely profitable business. The 2004 Firstplus accounts show turnover climbed to £249m - from £182m in 2003 - and profits increased from £68m to £93m. A large proportion of these profits are likely have come from the sale of single premium PPI.
But how much, Firstplus refuses to say. If a study by the Department of Trade and Industry reflects the sales of PPI by Firstplus, then there is every reason to believe it is also making margins of 70% or more in this area. The study showed that about 25% of credit card customers and half of loan customers buy cover for their loan and credit card payments from their bank, but only 4% of customers claim on it. A quarter are turned down. Yet banks say they must charge up to a quarter of the total loan value for PPI cover, as in the case of Mel White.
Last month Citizens Advice told the Office of Fair Trading it must examine whether the banks are mis-selling and overcharging for PPI cover. Citizens Advice made a "super complaint" in 'Consumers pan save thousands by avoiding banks and credit card companies' the hope that the OFT would recommend a full-blown investigation into PPI sales. Critics of the banks said a covert survey by the Financial Service Authority made an investigation almost certain. The FSA said it uncovered "poor selling practices and a lack of proper compliance controls among a sample of firms". uSwitch.com Personal Finance, the comparison website, joined the ranks of independent operators who say that consumers who want PPI cover can save thousands of pounds by avoiding banks and credit card companies.
For example, a £10,000 loan taken out over five years with NatWest costs £11,934-60 in total. But if PPI is included, it increases to £14,998.20- an additional £3,063.60.If PPI is bought from the independent operator Paymentcare, it costs £656.40, giving consumers a saving of £2,407.20. Barclays denies it makes 10% of its profits from PPI. It says claims of high pressure selling by its staff were inaccurate. It says customers are given all the costs up front and are free to buy from independent suppliers.
A spokeswoman adds that 80% of customers who make a claim are accepted, contrary to the DTI findings, Phillip Inman.