Rip-off insurance deals are over - but now costs will rise

Liverpool Victoria Banking Services, which describes itself as the UK's largest friendly society, was ordered by the Financial Services Authority to pay £840,000 for "serious failings" in the sale of PPi policies. It sold 14,500 of them between 2005 and 2007 at an average cost of £1,600. If Liverpool Victoria had not cooperated with the FSA at an early stage and agreed to make automatic refunds of interest, the penalty would have been as much as £1.2 million.

Payment protection insurance is designed to help cover monthly repayments on items such as personal loans, credit cards and mortgages if the policyholder has to stop work because of illness, accident or unexpected unemployment. The product is often sold to borrowers when they take out a loan.

Until 2006, Liverpool Victoria used to add the cost of the single PPi premium to its loan quotations without being asked to by the customer. If the FSA had not intervened, its customers would have been paying interest on the PPi premium until their loan was paid back. There are some 14 million PPi policies in force and the vast majority are sold alongside loans. Borrowers do not realise they can buy cover more cheaply elsewhere. The result is an uncompetitive market.

According to a report from the Competition Commission in June, consumers are overcharged by more than £1.4 billion a year. Lawyers predicted at the time that this report would force radical changes in the way PPi was sold. "It is possible that certain products may become unviable," said Chris Busby, a partner at Eversheds. The law firm has acted in the past for companies accused of mis-selling financial products and is now expecting claimants' lawyers to bring legal actions on behalf of thousands of consumers. It believes claims management companies are trawling through their records of people who have previously complained about endowment policies or bank charges, looking for PPi policy-holders who might now be willing to sue.

Busby accused claims management companies of issuing claims for PPi mis-selling without investigating the background to the transaction fully or even at all. "In some cases these complaints are speculative and unjustified," he said.

A quick internet search will produce plenty of companies offering to recover premiums and interest for PPi policyholders who were sold insurance for a shorter term than the loan they were protecting, or who would have been ineligible in any event to claim on their policies. those who can show they were missold policies may expect to have their PPi premium refunded. But Jonathan Richards, a partner at Eversheds, says that consumers often do not realise that this will also result in the cancellation of their policy. That might be the last thing they would want at a time of rising unemployment. "It's like selling your umbrella just as it's about to start raining," Richards adds.

"I do wonder what will happen to all those people who have claimed back their premiums and become unemployed," Richards says. "What will happen when they find they are uninsured? Will they complain about the claims management companies?" Those consumers who claim back their premiums should also appreciate that claims managers may deduct a contingency fee of as much as 25% from everything they recover. But policyholders may find that the Financial Ombudsman Service will help them get them their money back without any deduction.

Either way, though, claims like these could push prices up. Companies that no longer make large profits on PPi may have to charge more for the goods they sell or the loans they provide. It's a harsh world out there.