With a victory already in the high court of the Office of Fair Trading (OFT) against banking institutions for illegal banking charges, another scandal of even greater proportions is now looming and makes the banking charges debacle seem like a mere trifle.
Banks are estimated to earn £4bn a year by charging their customers for unauthorized overdrafts, bad checks and unpaid direct debits. The retail banking system is arguably the most profitable business sector in the UK, with banks earning an average of £75.00 per customer per year compared to the retail sector at just over £50.00.
However, no one knows for sure how much money banks have made in recent years in an area that will be the subject of the latest scandal. The numbers are so steep that banks are bracing for claims that are sure to set a precedent for the highest fines and consumer compensation claims ever seen in this economy.
The area in question is the misleading sale of Payment Protection Insurance (PPI). Several financial institutions have already come under fire for misleading the sale of these products, but it looks like the floodgates could open soon.
If you’ve ever taken out a mortgage or loan, you’re probably familiar with situations where the lender tries to persuade you to take out insurance to cover your payments in case you’re unable to work due to job loss, or if you’re get sick or have an accident. On the surface, these offers seem quite reasonable, especially when you consider that unexpected misfortunes happen and no one can predict what’s around the corner. Therefore, taking out insurance for these events seems like the sensible option.
But there are a number of key areas that have been identified as misselling this type of insurance. There are many examples of this that have been identified, including:
– That the lender tells you that contracting the insurance is a condition of the loan. It is a difficult situation to question a lender about PPI, especially when he has the guarantee of an approved loan if he purchases the required insurance policy.
– That the insurance is more expensive than the loan itself. In many cases, bba lenders typically make more money from the sale of the insurance policy than from the interest they earn on the loan. In a typical scenario, if you borrowed £10,000 over 60 months (5 years) at 6.5%, the interest payment would be £1,700.00, but the cost of insurance would be £2,100.00.
– In other cases, many of the products recommended by lenders are not suitable for the people who buy them. If, for example, you are self-employed or have a short-term contract, most policies that provide unemployment coverage will not cover your reimbursements in the event you lose your income, as they are geared towards those who have a job at full time.
-The client does not even realize that he has the insurance. With the complicated jargon used in loan documents, many banks take full advantage of this, using terms like “fully secured loan” which is just another way of saying “we are taking money out of your pocket without your knowledge”.