A Citizens Advice Bureau report has fuelled the controversy over payment protection insurance. Andrew Holt weighs up the issues

Payment protection insurance (PPI) is seen as something of a bastard child within the insurance family. Frequently looked upon with scorn, it is in the spotlight again after the Citizens Advice Bureau (CAB) launched an investigation into the apparent mis-selling of PPI.

CAB says that PPI is a particular problem for the most vulnerable borrowers, who are also the people most at risk of running into financial difficulties.

CAB research found that 85% of CAB clients who had claimed on PPI had been unsuccessful - in sharp contrast with industry assertions that only 15% of claims are turned down.

Based on evidence from 270 citizens advice bureaux it says that in many cases PPI is more about providing an additional source of profit for the financial industry than about protecting consumers.

CAB claims that problems occur in nearly all sectors of the consumer credit market - from non-status mortgage lenders and hire purchase companies to major high street banks and credit card companies.

The premium paid can be equivalent to 25% of the value of a loan and has to be paid for by borrowing more, with PPI on some credit cards increasing their interest by around 9% a year.

False security
Citizens Advice chief executive David Harker says: "People are lulled into a false sense of security, only to find that far from providing protection against an unexpected drop in income, payment protection insurance often just adds to their debt problems.

"At best, the excessive cost for minimal benefits makes it bad value for many people. At worst, mis-selling means the most vulnerable people are parted from large amounts of money under false pretences and left even more exposed to debt. This is particularly worrying at a time of high personal debt."

CETA, the general insurance network, believes that the mis-selling of mortgage payment protection insurance (MPPI) is a growing problem that has the potential to damage the reputation of the whole industry.

David Quick, managing director at CETA, explains: "We understand from a source close to the FSA that it is very concerned about companies selling MPPI to customers who may not be able to make a claim under the terms of the policy.

"In many instances, mis-selling is fuelled by the unrealistic setting of sales targets, but in some cases brokers have also been unwittingly selling inappropriate policies to clients who do not need the type of cover on offer."

But Simon Burgess, managing director of Burgesses, a specialist payment protection broker, says the problem is with high street banks and building societies.

"High street banks and building societies have a poor reputation when it comes to selling payment protection insurance, because they hike the premiums up so much.

"Often their products are provided by subsidiary insurers and the policies are designed to maximise profits and not pay the claim. They do not use these products as a risk management tool, but as a profit-making machine."

Burgess says the bulk of mortgage payment protection policies sold in the high street are on average, £5.78 a month, per £100 of cover. "This can be bought for less than £4 per £100 from a multitude of IFA and broker websites," says Burgess.

Quick warns that for a broker to sell an 'off the shelf' MPPI policy is a clear case of mis-selling.

"Many brokers who have been selling 'one size fits all' policies in the past are often unaware of the dangers of continuing to sell them in the future. Unfortunately, most general insurance sourcing systems cannot tailor MPPI policies to meet a client's specific demands and needs, which has only exacerbated the problem."

There appears however, a general malaise among the broking community. Brokers would rather focus on traditional home and motor markets, than take a share of the £5bn commissions that are available from these products.

"But brokers have all the key attributes to be able to sell this product to the right people and in the right way. We listen to the customer, get under the skin of what's wanted, understand and identify those needs and provide that personal service. These are skills and talents our high street competitors will struggle to match," says Burgess.

Independent research undertaken by the London School of Economics has shown that for 55% of the working population, payment protection insurance has some merit.

But Burgess says: "Banks and building societies have sales targets of 85%. This means that around a third of the people targeted would have no use for this product."

But the LSE's study is backed up by research undertaken by Cardif Pinnacle, which showed that people do need and want PPI. Globally, 64% of respondents acknowledge the need for creditor insurance as "essential" or "stressing its convenience".

For Steve Devine, corporate communications director at Cardif Pinnacle, constant unjustified bad publicity as represented by the CAB report is one reason why PPI is so badly perceived.

"That in this time of spiralling household debt, organisations such as CAB and most of the national newspapers are doing their up most to destroy the existing safety-net provided by private insurance. Even though there is precious little in its place, for example savings," says Devine.

Safety net
Although he admits: "Nothing is perfect and there are certainly areas where improvements can be made to creditor insurance and rest of the insurance safety net.

"But the constant barrage of negative publicity is likely to encourage borrowers, who have decided to take out insurance to protect themselves, to cancel their protection and leave themselves vulnerable to the ravages of recession, globalisation, job losses, accidents or ill health."

Devine also noted that the CAB report is based on evidence between January 2004 and April 2005, suggesting that very few of the case studies were after the insurance conduct of business (ICOB) rules were introduced on 14 January, therefore not applicable to the new more stringent regulatory environment.

"No dates are provided so it's impossible to know if they were or not post ICOB. The FSA and our industry must be given the opportunity to see if regulation is working."

He also makes the point that CAB customers are not a true reflection of the borrowing public. "Successful claimants on PPI policies are less likely to enter the doors of CAB offices. Therefore I believe its evidence is flawed.

"The last hard fact is that the current creditor market has not deliberately set out to exclude direct providers and wider consumer choice. The fact is that borrowers do not usually shop around for creditor insurance. If they did there would be a market to support their behaviour," says Devine. IT