PPI and the Mysteries of Insurance

     I was recently in a mobile phone shop. In front of me in the queue was a teenaged boy, about the same age as my sons. He had just chosen a very smart new phone and was in the process of paying. It was too hot in the shop and I was bored and wanting to leave, daydreaming and not really concentrating. Then I heard the salesman offer him insurance and I began to tune in. The salesman had a great patter, all about how annoying it would be if the boy lost his phone, how he was spending £200 on a new phone and if it was stolen on his way home, that was it, no phone, no £200. However, for a small amount each month, he would only need to pay the first £50 and then the shop would replace his phone, with a brand new one, for free. Was he prepared to risk having nothing, or would he like to take out insurance and be sure that his phone would be replaced?

“No,” I shouted, “Don’t do it! The amount you will pay over two years plus the £50 excess is more than enough to buy a much better phone. And how likely is it to be stolen anyway? Quick, run away.”
Actually, I didn’t. Not out loud anyway. My children have spent many years teaching me what is socially acceptable and even I knew it would be inappropriate to shout at a complete stranger. However, in my head I was. Hence the purpose of this article.

Do you understand insurance? Now, in the UK, ripping off teenagers is not illegal, as long as you correctly explain everything to them first. Even if they are slightly dim, even if your patter is exceptionally impressive and biased, that is not against the law. We have a basic principle in our law that states “buyer beware”. That means, the responsibility for checking and understanding is with the buyer. Anyone can sell you anything and if they explain (even very briefly or with a strong bias) what is involved, that is not against the law. It is up to the buyer to be wise. When someone tries to sell you insurance, listen carefully. Use the calculator on your mobile if necessary or tell them you will think about it and come back tomorrow. Be sure that financially, it will actually benefit you. Do not trust them. Especially on mobile phones. There is a rumour that mobile phone companies make more profit on selling insurance than they do on selling phones. Is it your money they are taking?

In the last five years however, the government has subtly changed this for banks. For big banks, the principle seems to be “seller beware”. This means, the responsibility for being sure the correct product is being sold, that it really will benefit the customer, is now increasingly with the bank, not the person buying. So, if you recently bought a product at a bank, like an ISA or insurance and you now feel that actually, it was not the best product for you, go back. If the bank does not refund your money, you can write to the ombudsman and they probably will.
The government has not changed the law (which is still “buyer beware”) but it has forced banks to behave differently. This is mostly due to PPI. PPI has been huge. It has caused those annoying phone calls that always arrive when you are in a rush or in the bathroom. It is why we get those irritating texts when you think someone must love you after all but no, it is an irritating claims management company (read “shark“) hassling you. It has also had a huge impact in the last five years on the car industry because of all the reclaimed money boosting new car sales! So what exactly is it?

PPI was Payment Protection Insurance. It was always a rubbish product. If you had a loan, you could take out an insurance so that if you lost your job and couldn’t manage your monthly repayments, the insurance would pay them for you. But it only paid for a short time and the insurance itself was quite expensive. Banks did things like add it onto the end of the loan, so you paid them back for longer but you didn’t really notice. Banks were also bad because they sold it to everyone. Even little old ladies or unemployed people who did not have a job to lose were sold PPI (boo, hiss, we all hate the banks….) They did what the mobile phone shops do, they explained it quickly and with bias so people agreed to pay without really thinking about whether it was good for them.

The government decided that banks should pay out. They wanted this for three reasons:
Firstly, banks had been bad so they needed to put it right. A punishment really.
Secondly, people like being given money. It makes them feel happy. People vote for governments they like….. or perhaps I am just being cynical.
Thirdly, the government wanted to shift the responsibility for selling the right products to the banks, away from the buyer.

So the regulator (this is the bank police) have made new rules. Some of these were even backdated, so banks could be penalised for not doing things before the new rules had been written. If one of those annoying claims persons (aka shark) persuades you to write to your bank and say you were wrongly sold PPI, the rules are so tough that it is easier for the banks to just pay out without doing proper checks. Even people who never bought PPI in the first place are making claims. Which actually, is stealing. The claims management companies know this and decided that they want a share too (imagine sharks circling.)

Okay, so PPI was a bad product and banks behaved badly when they sold it to little old ladies. But what do you think about what has happened since? One of the greatest things about the UK is the fairness of our legal system. Compared to most of the rest of the world, our legal system is fair and we trust it. It makes the UK a good place to live and do business with. Is it okay for them to be unfair to banks and not to other companies? Do we want our banks to go bust?

Should the same rules be applied everywhere? What this unfairness has done is make banks be “seller aware.” This safeguards people like us, who perhaps don’t really understand the financial products we are buying. Maybe the same principle should extend to mobile phone companies………

xxxxxxxxxxxxxxxxxxxx

Every week a new current financial issue is clearly explained at: http://www.anneethompson.com under “mystery of money”.