MP urges inquiry into bank profits from payment protection

Fresh evidence of the huge profits banks make from payment protection insurance (PPI) has emerged as part of a continuing Jobs & Money probe into the high-cost plans, which people are encouraged to take out with mortgages, personal loans and credit cards.

The revelations come as Vincent Cable, the Liberal Democrat shadow chancellor, calls on the Office of Fair Trading to investigate "the serious problems and inflated premiums and anti-competitive behaviour in the market for payments protection insurance."

Last month Jobs & Money exposed how Barclays made vast profits from a wholly owned offshore PPI company in Dublin. This showed how Barclays took in some £350m in premiums but paid around £90m to borrowers with its accident and sickness plans. We also revealed how banks often pressured customers into buying the cover when there was little chance they could claim.

Now we show how a wholly owned offshoot of HBOS, the Halifax-Bank of Scotland union, enjoys similar profit margins. And we can reveal many banks have increased efforts to sell the lucrative cover.

HBOS wholly-owned subsidiary St Andrews Group, based in Esher Surrey, is a "specialist creditor (PPI) provider." It insures the PPI plans of customers at both Halifax and Bank of Scotland.

But because it is based onshore, it can - and does - provide PPI policies to a number of other lenders both in the UK and overseas in countries including Ireland, Australia and France.

It is impossible to break out business from any one bank in the St Andrews figures. But managing director John Blundell says: "We continue to achieve recognition throughout the HBOS Group as the experts in the creditor market."

Overall, however, accounts for the year to December 31, 2002, show premiums (after re-insurance costs) amounted to £169m, up from £122m in the previous year.

But just £19.8m went into meeting claims from insurance purchasers - just 11.7% of the total premiums. A further £4m was paid out from re-insurers, mostly in the Lloyd's market.

In rough terms, only some £1.33 in every £10 collected in PI premiums from borrowers went back to customers of mortgage, personal loan and credit card products to help tide them over periods of unemployment or illness.

Amazingly, the St Andrews figures show £117m in "operating expenses." Part of this covers staff and premises costs. But the great bulk - £108m - is listed as "acquisition costs."

This is the sum that goes back to "clients" - the banks and other lenders who originate the business. Some of this is commission - a figure that may have to be revealed if the Financial Services Authority decides to regulate PPI next year.

Much of it is in profit-sharing schemes whereby banks and St Andrews agree to divide the balance of premiums over claims. But after all these costs, St Andrew's states its net profit margin is just 10% - " set against a very benign economic environment, which could deteriorate if interest rates and unemployment rise."

Despite this possibility, many lenders, according to St Andrew's, "became more committed to increasing the revenue from finance related products in 2002." The insurer promised a "drive to maximise our client's profitability from insurance-related products."

Simon Burgess, a specialist PPI broker who claims to undercut bank rates by 50%, says: "It is easy to hide profits through wholly-owned subsidiaries.

"But the key figure is the percentage of premiums paid in claims. Many banks pay as little as 10 to 15%. We pay 65%. The fact that banks tend to use one insurer shows how small the risks are."

MP Vince Cable is calling for an OFT investigation under the Competition Act into PPI, citing "the lack of transparency in what is a specialist and narrow market. This could be a source of excess profits accruing to the main clearing banks and specialist brokers."

He also worries about the lack of disclosure - he wants banks to reveal commission. But following Jobs & Money's expose of PPI, he says he will now go further.

"I was not aware of the tied relationships and ownerships between some banks and specialist PPI insurance companies. There is obviously a transfer pricing issue. The argument for an official probe is strengthened by the banks' use of in-house insurers. There is a scandal lurking here," says Mr Cable.