Move by the Central Bank on PPI products could result in financial institutions being forced to pay back hundreds of millions of euro to consumers

STORM CLOUDS are gathering over the payment protection insurance (PPI) business in the Republic. Banks and other firms which sold the insurance to consumers who could do little or nothing with it may soon be forced to issue hundreds of millions of euro in refunds.

Yesterday afternoon, the Central Bank announced it had demanded seven companies doing business here to carry out a “comprehensive review” of the sale of such policies going all the way back to 1997. Such a review is long overdue.

A Central Bank review of claims processing for PPI policies undertaken in 2009 found that, where a claim was declined, it was generally in accordance with the terms and conditions of the policy sold.

However, it also appeared that consumers were often not aware of the exclusions attaching to their policies, or, in some instances, it appeared they may not have ever been able to claim.

Where it was found that claims were declined due to the employment status of the claimant, the Central Bank felt it was reasonable to question why the employment status was not picked up at point of sale.

At this point the seller should not have offered the product or at least alerted the consumer that they may be eligible to claim for the health/sickness benefits but not the unemployment benefits as is the case in some policies.

The initial Central Bank investigation was not carried out in isolation. PPIs can be made look very attractive by offering to clear outstanding debts on credit cards or other loans in the event that a borrower falls sick or loses their job and are unable to cover their debts.

But they have been dogged with controversy in the UK in recent years after widespread mis-selling was uncovered. As a result of sharp practices there, millions of consumers were issued with billions in refunds.

The customers in question were mis-sold expensive and frequently useless insurance policies, which were hugely profitable for the banks. The policies were sold to the self-employed, but the bank salespeople failed to inform them that they would never be able to claim against becoming unemployed.

Policies were also sold to people who subsequently fell ill as a result of a pre-existing condition, which invalidated their insurance.

In some cases, customers were denied loans or mortgages unless they took out payment protection insurance. Some were unaware they were paying for them.

An investigation by the British Competition Commission in 2008 found that for every £100 received in premiums for PPI, just £15 was paid out to cover claims. This compares with £78 paid out in car insurance and £54 in home insurance.

On a €10,000 loan you might pay as much as €2,000 extra just for PPI, and on a credit card it can equate to as much as 8.5 per cent of a monthly balance.

On a mortgage the figures increase quite considerably. You can expect to pay €4.75 a month for every €100 outstanding on your home loan.

Over a term of 30 years, this can see you paying as much as €20,000 for the benefit of payment protection insurance, which in many cases would not cover you should you need to use it.

In recent weeks, both AIB and Bank of Ireland have been forced to issue millions of euro in refunds over mis-sold policies – and it is believed that this could be the tip of the iceberg.

Approximately 340,000 PPIs were sold in Ireland between August 2007 and November 2011, more than 80 per cent of them through banks and credit institutions including credit card companies, and that is where the Central Bank’s energies are currently focused.

In its most recent investigation, it uncovered a case of an unemployed woman being sold PPI policy to cover repayments on a loan. She would never have been able to make a successful claim due to her unemployment status at time of sale.

A man who was in full-time employment but who worked just 16 hours per week was also sold such a policy despite the fact he would never have been able to make a successful claim due to the requirement that a person must work at least 18 hours per week.

Another woman told the financial institution which was doing the hard sell that she was working abroad, with her home address in Ireland. She would never have been able to make a successful claim as the policy required her to be living and working in Ireland.

Then there was the man who, the Central Bank said, had “extremely poor English” and didn’t understand what the sales agent was selling him, but was still convinced to buy a PPI policy in conjunction with a car loan.

In all of these cases, the consumers involved received a full refund of premiums paid or had their claims successfully processed following the investigations by the Central Bank.