Category Credit
SUB CATEGORIES Credit Bureaus  |  Credit Insurance |  General | 

‘Heartbreak Hotel’ beckons as PPI becomes a UK industry issue

09 September 2013 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

When Elvis Presley burst onto the music scene in 1954 with his gyrating hips and unconventional sound, there were many older folks (particularly in the more conservative parts of the USA) which boldly stated that this type of music will never catch on.

However, after 30 number one singles and being lauded as ‘The King’ of one of the most popular music genres the world has ever seen, many of Presley’s naysayers have had to come to terms with the fact that he was a musical genius and that the world would not be the same without him.

But what does this have to do with the financial services industry? Well, the 2009 Global Financial Crisis profoundly affected society and significantly impacted certain aspects of society which will never be the same again. Thus the current environment begs that protection insurance should be foremost order of the day.

In the past, payment protection insurance (PPI) or also known as credit insurance, credit protection insurance or loan repayment insurance was largely taken out as a ‘Plan B’ on a rare occurrence that the insured would not be able to make payment for items purchased on credit. But with the global economy in the state that it is in, companies are increasingly turning to PPI to save them from a few trips to the ‘Heartbreak Hotel’.

Is PPI for everyone?

The simple answer to this is no. The increased dependence on PPI was highlighted by Associated Compliance in their regular newsletter in which they pointed out that PPI is different from other types of insurance in that it can be quite difficult to determine whether a person is suited towards it or not. “Careful assessment of what would happen if a person became unemployed has to be considered as payments during the unemployed period may render a claim ineligible despite the insured person being genuinely unemployed,” says Associated Compliance spokesperson Craig Ormrod.

The very nature of the insurance industry is that some claims are accepted while others are rejected. While the ratio between the two is quite admirably manageable in some general insurance sectors, this is not the case with PPI where the number of rejected claims are very high.

Ormrod points out that this is because there is a significant problem at the underwriting stage where PPI is not being underwritten at the sales stage and is sold to customers without careful consideration as to whether PPI suits their personal circumstances.

Because of the nature of the product that it protects (loans, vehicle finance, credit cards and bonds), PPI is sold as an add on service when the original product is bought. This was particularly prevalent in the UK who, like South Africa, managed to avert the worst effects of the 2009 global financial crisis. It is estimated that by May 2008, 20 million PPI policies existed in the UK with a further seven million policies a year being purchased after that.

However, it can also be seen as the industry’s saving grace, as was the case in the UK. While many UK residents were battling the emotional trauma of unemployment in the years following the crisis, financial service providers made sure they did not lose out.

A little less conversation…a little more action

While it can be seen as one of the reasons why the UK didn’t turn towards austerity measures or towards the European Union for bailout plans, the public saw it in a completely different light.

Financial service providers sold the PPI plans upfront, yet statistics show that 40% of policyholders were unaware that they had a policy. Ormrod points out that this lead too many feeling that it was miss-sold and allegations of it being miss-handled for well over a decade has seen several high profile companies being fined by the Financial Services Authority (FSA). “Alliance and Leicester were fined £7-million for their part in the miss-selling controversy. Several others including Capital One, HFC and Egg were fined up to £ 1.1-million.”

And if you think that these are the only industry cases around, reports show that the UK is now paying the price of miss-selling PPI insurance to the tune of £ 14-billion in compensation and related costs.

In a rear-guard action to prevent future cases from damaging the credibility of the industry, the FSA have implemented some key rules which will enable the customer to shop around and make an informed decision. These include:

- The provision of adequate information when selling payment protection as well as the furnishing of a personal quote.

- The obligation to provide an annual review


- The prohibition of selling payment protection at the same time the credit agreement is entered into.

Local headaches

While PPI was the UK’s saving grace, South Africa’s claim to fame was that government implemented stricter lending rules which made it harder for the consumer to get credit. However, you can bet your bottom dollar that those who managed to get credit were sold PPI.

There is a lot which can be learned from the UK example. If statistics show that 40% of a fairly well educated market was unaware that they have PPI, how high will this statistic be in South Africa? And if there is a misappropriation of PPI in the UK market, the likelihood of a similar misappropriation in the South African market is very good.

However, the Financial Services Board is doing its best to regulate the industry so that this type of exploitation does not occur. Perhaps now we will see FSB’s harshest critics actually applauding the body for its efforts to maintain the credibility and integrity of the industry.

Editor’s Thoughts:
Rules without implementation is like going to a casino to watch other people gamble…it’s a bit pointless. The FSB is busy regulating the industry, but there needs to be gatekeepers who will make sure that credit providers don’t step on the public’s ‘blue suede shoes’. Perhaps the FSB will adopt similar rules as part of its TCF campaign? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].

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