Customers get poor deal with payment protection, says CSFB
Monday April 4, 2005
Consumer groups reacted angrily yesterday to a report highlighting the cash raked in by banks from the sale of controversial insurance designed to protect credit card and loan repayments.
The Consumers' Association said the report was new evidence that banks are profiteering when they sell payment protection insurance to customers.
The watchdog said the report supported its research, which showed the insurance products were mis-sold and a large number of claims were turned down, resulting in even bigger profits.
About 25% of credit card customers and half of loan customers buy payment protection from their bank. About 14% of Lloyds TSB's total profit comes from the sale of such policies, according to a report by investment bank Credit Suisse First Boston.
Barclays, Egg and Alliance & Leicester are also heavily reliant on the commissions earned from the sales of payment protection insurance. The report claims it represents 10% of Barclays' profits while at Egg it represents the equivalent of 180% of profits.
Lloyds TSB, Barclays, Egg and A&L said they did not publish profit figures for their insurance business and refused to comment on the CSFB report other than to say their products were transparent and offered good value for the customer. Lloyds TSB and Egg added they had diversified their product range in the last year and were now less reliant on income from payment protection insurance.
CSFB said that while the industry claimed the products were good for the customer, "there is evidence to suggest it is sometimes sold without the customers being fully aware it is optional". Department of Trade and Industry figures show only 4% of customers claim on it, of whom a quarter are turned down.
CSFB warned investors that a clampdown by regulators on the charges could knock a significant hole in profit figures. An Office of Fair Trading review into commission charged for payment protection on store cards is under way.
Last year the Guardian published details of how Barclays was enjoying profit margins of 70% selling PPI policies to more than two million customers with Barclayloans, Barclaycard and Woolwich mortgages. About two thirds took out the insurance at the bank to make sure they could keep up monthly payments on their credit cards, loans and mortgages if they were made redundant or fell sick.
In 2000-01 the bank made £240m profit on a turnover of £350m from the business, which is based in Dublin. Other banks are thought to make similarly high profits from the policies, the costs of which are routinely bundled into repayment quotations offered to borrowers. About 15 million people in Britain have such insurance.
Mike Naylor, principal researcher for Which?, said a recent report by the consumer body highlighted how loan and credit companies boost profits by selling expensive and sometimes inappropriate insurance. The report estimated that loan companies earn at least £1bn each year from sales of the insurance."PPI on personal loans is expensive, gives limited cover, and can be useless for the self-employed or those on contracts.