Watchdog urged to act over mis-selling of payment protection insurance

Complaints about personal protection insurance sold with loans, credit cards and mortgages have increased ten-fold in the last two years, according to a watchdog.

The Financial Ombudsman Service said it receives 500 complaints a week about the insurance – 25 per cent of those it gets.

The watchdog said a 'significant proportion' are being upheld and this points to 'widespread consumer detriment'.

The watchdog has written to the Financial Services Authority (FSA) calling on it to bring the banking and finance industry into line.

An official study has suggested that consumers are being overcharged by at least £1.4 billion a year through rip-off premiums on the policies.

Millions of people have apparently been duped into buying expensive Payment Protection Insurance (PPI) based on misinformation.

People are told lies by salesmen - some claim that customers will only qualify for a loan, a card or finance for a car if they sign up for the PPI.

It is supposed to come to the rescue if a person suffers a sudden loss of income, such as becoming unemployed or falling sick.

However, there are many examples where it has been sold to consumers who do not even qualify for cover, such as pensioners, the sick and the self-employed.

A spokesman for FOS said: 'PPI complaints have risen ten-fold in the past two years, and are now 25 per cent of all the complaints we get.'

The ombudsman service said unusually for an insurance product, the complaints typically relate to people thinking they have been mis-sold a product, rather than that they have been unable to claim on it.

Common complaints received by the FOS are that people did not realise they were taking out PPI when they were sold it alongside a loan or credit card and that the cost of the policy was not explained to them.

In many cases consumers are charged a single up-front premium which is added to the loan and attracts punishing levels of interest.

Earlier this year, the Competition Commission identified major problems surrounding the sale of PPI by banks and retailers. It was particularly concerned about the rip-off prices.

There are more than 14 million PPI polices in existence alongside loans, mortgages, credit cards, store cards and car finance.

Some firms have ramped up premiums with the result that policies are often more expensive than deals available from a specialist company.

The rip-off premiums can add many thousands of pounds to loan repayments.

It is possible the commission will put a cap on PPI charges or prevent banks selling the policies alongside other products.

Just this week, the consumer group Which? condemned the PPI sold with credit cards as worthless. It said few people are able to make successful claims.

Personal finance campaigner at Which? , Doug Taylor, said: 'Credit card PPI is a modern day snake oil - it's a useless product, expensive and poorly designed.

'As the credit crunch continues to take hold, people want to be protected and have peace of mind, but credit card PPI, like a house of cards, won't give you the support you need.'

The FSA has fined a number of household name firms over the mis-selling of PPI.

These include the HFC Bank, which was fined £1.085 million, Capital One bank, which was fined £175,000, and GE Capital Bank, which provides store cards for leading retailers, which was fined £610,000.

The FSA said: "The FSA is reviewing the position in the light of the information it has received from the ombudsman service, and the information provided by its own ongoing thematic work on PPI.

'It will make a decision on possible measures to take on the basis of this review in due course.'

The British Bankers Association (BBA) insists that PPI is becoming an increasingly important safety net for consumers. It said restrictions on sales 'could leave customers exposed, just as economic conditions are worsening'.