Why and how was PPI Mis-sold?
The important thing to understand with regard to why Payment Protection Insurance (PPI) was mis-sold is the actual product itself. The product itself should have covered people in relation to unemployment, disability, illness and a variety of other conditions, which would warrant the customer unable to meet their monthly commitment for the borrowing that the policy was taken out upon. Indeed, in the event of death, the product should have been repaid in full.
Unfortunately, the product itself was fatally flawed, in that a majority of exclusions applied to people. In fact, at one point the ability to make a successful claim against the product was as low as 7%! The product was therefore ultimately useless.
Payment Protection Insurance itself was mis-sold because the Banks (through its training of its staff) did not give the clients the protection they deserved to ascertain whether the product itself was ultimately effective, applicable and worth the expense in taking it out, against the product involved.
An example of how poor the sales techniques was for the vast majority of the Payment Protection Insurance is in relation to secured borrowing. People would take finance of, say £20,000, over 10 or even 15 years and Payment Protection Insurance would be added. Unfortunately, the Payment Protection Insurance would only run for 5 years and, in some extreme cases, up to a maximum of 7 years. The Bank was therefore only securing the product for a short period of time, and certainly not for the full duration of the facility.
In turn, if the loan facility was, say £20,000 over 15 years, the PPI premium would have been in the region of £5,000. This would have been added to the loan, so the loan would effectively be £25,000. Interest would then accrue on not only the £20,000 that you were borrowing, but also the additional £5,000 which was added on (at whatever rate of interest was negotiated at the outset). Therefore, as with all loans, there is very little capital repayment in the first few years. Clients’ would then find themselves in a position that after the PPI became ineffective, (namely after the 5 or 7 years’ worth of cover that it provided) they would still owe over £20,000 – which was the sum that they originally went in to borrow! Of course, the PPI cover had, at that point ended, and they were therefore borrowing £20,000 without cover. The question therefore does beg – why would that cover have been any good in the first place? Of course, the answer is that it would not have been.
The selling agent at the Bank, who is only a staff employee, would also have had to ascertain whether any exclusions would have been applicable in the customer’s particular circumstances. This could be, for instance, whether they were self-employed. If this was the case, the unemployment side of the benefit would not be applicable. Other considerations would have included whether there were any medical exclusions in place. Again, the insurers rarely paid out and this meant that the majority of people who had some sort of medical episode (regardless of whether they believed that it was directly responsible for the condition which has caused any form of claim at a later date) would render the policy, yet again, ineffective. Having seen the policies in action, from my own personal experience, and the way that the insurers and the Banks have dealt with them, they are about as much use as a warranty that you would get from a dodgy second-hand garage – and not worth the paper they are written on!