Watchdog let this 'rip-off' happen

The watchdog which supervises the selling of controversial payment protection insurance was this week accused of turning a blind eye to excessive charges and failing to ensure consumers obtain a fair deal.

Earlier this month Jobs & Money exposed the vast profits Barclays Bank has made from selling expensive and sometimes unnecessary loan protection, with a mark-up of as much as 70% on PPI products.

PPI is designed to cover customers unable to meet repayments on personal loans, credit cards and mortgages as a result of becoming unemployed or sick, or having an accident. Annual sales of PPI products in the UK are estimated at around £2.5bn.

This week the spotlight turned on the General Insurance Standards Council, which regulates PPI. Simon Burgess, the UK's leading independent provider of loan protection insurance - this company charges half the price demanded by banks - said: "The GISC has categorically failed in its duties to protect the best interest of people buying insurance."

Mr Burgess also highlighted what he describes as a "conflict of interest" between GISC's supervisory role, and the way it raises money to finance itself.

The Council derives its income from a levy on the sale of insurance products, and Mr Burgess estimates that in 2003 it earned "the equivalent of a seven figure sum" from PPI sales by members.

"You have to ask why this organisation appears to turn a blind eye to the rip-off charges and below-par products sold by banks and building societies to unsuspecting customers," said Mr Burgess, who is demanding the GISC launch an investigation. "The GISC is sitting on its hands, while its members are ripping off customers."

Norman Lamb MP, a member of the Treasury Select Committee, who welcomed Jobs & Money's expose of the PPI industry, says he is concerned that there may be "a potential conflict of interest" and that GISC's relationship with the insurance industry "looks too cosy".

"When less profits means less money how rigorous are they going to be?" he asks. His impression of the GISC is that it is "not particularly effective" on the issue of PPI, and that it operates "with a very light touch".

The GISC confirms its annual income of £7.5m comes wholly from its members, but refutes any suggestion it is in the pockets of the insurance industry, or that it is turning a blind-eye to misdemeanours.

"We have 6,000 members. No one particular member would have any bearing or relevance on our finances. There is absolutely no question that our members have any influence over what we do," says Angela Darling, GISC's head of policy.

She adds that not all PPI providers are GISC members, and that PPI is "a very small element" in its members' overall business.

GISC members pay a fee based on a percentage of their revenue from general insurance - 0.1% and 0.025% for intermediaries and insurers respectively, but this is subject to a maximum of £100,000 for any one member, says Ms Darling.

She argues: "Such a sum is irrelevant to our general budget or funding per year, so nobody has got an undue influence over us." And she says, this amount is a drop in the ocean to big member companies such as Royal & Sun Alliance, or Lloyds TSB.

Simon Mason, a director of Moneysupermarket.com defends the GISC." I actually think that GISC does a very good job, and they do not kow-tow to any one provider. We have seen no evidence that they are toothless, it is just that they are a small organisation trying to regulate a massive massive industry."

The real difficulty the GISC faces as a consumer watchdog is the huge profit margins being made by the banks in selling PPI products, says Mr Mason.

And here its hands are tied, he says. "Under GISC rules, the amount of commission that the banks earn does not have to be divulged to the customer. Nor do the GISC rules dictate that the banks should advise the customer that they can purchase standalone protection in place of the cover that is provided by the banks."

GISC can only take action against its members where there is clear evidence, says Ms Darling.

"We would certainly act if we found there was a problem, but we haven't got any evidence that PPI is generally a big issue for consumers."

According to GISC figures, it received just 118 enquiries from the public about PPI - including mortgage protection in 2003, 1.6% of the total. The GISC has done a lot of work monitoring banks and building societies particularly those selling PPI, says Ms Darling.

And the "very small" level of complaints shows that this is proving effective, she argues.

But others argue that urgent intervention is required to stop the rip-offs.

Mr Mason from Moneysupermarket.com says a "wealth warning" on PPI products should read: "We get 80%commission from this product, and you can buy it elsewhere at a much lower cost."

However, the insurance industry "will fight tooth and nail against any such proposal," he warns.

And even when the FSA takes over from the GISC in January 2005, consumers shouldn't hold their breath. "It is probably going to require legislation from Government to say that this product is such a rip-off."