The Financial Services Authority has told banks and building societies to compensate customers who may have been mis-sold payment protection insurance.

The ruling covers firms that have sold more than 40% of their “single premium” PPI policies at the same time as giving unsecured personal loans. The FSA will also target other companies that have mis-sold PPI when offering secured loans or credit cards.

The regulator has asked firms to reopen 185,000 rejected complaints about PPI.

Payment Protection Insurance is designed to cover debt repayments if you can’t work because of illness or redundancy, and is usually offered whenever you take out a loan, mortgage, credit card or store card, or bought something on credit.

However, PPI can often prove to be very expensive, especially when sold as a lump sum “single premium”, as you end up paying interest on both the insurance premium and your loan. It also comes with a number of exclusions which customers may not be aware of on purchase. For example, PPI does not cover pre-existing conditions or short-term employment, so it may end up being totally useless.

Consumer groups have complained for years that PPI makes huge profits for companies, but offers poor value to consumers. They have also accused lenders of repeatedly mis-selling the insurance, by neglecting to disclose the full terms and conditions to customers.

The FSA revealed that firms had rejected 60% of complaints about PPI, prompting customers to pursue their grievances with the Financial Ombudsman Service (FOS). Of the 16% of rejected complaints fielded to the FOS, 80% were upheld in the customer’s favour.

The FSA said it was now giving the financial services industry a “last chance”.

“It is unacceptable that despite previous warnings about poor sales practices, backed by 22 enforcement cases and significant fines, the PPI sector still needs the FSA to intervene on this,” said Jon Pain, the FSA’s managing director of retail markets.

“And the outcome of a complaint about a PPI sale should not depend on whether or not the complainant persists past the firm on to the Financial Ombudsman Service.

“All firms operating in this sector should take note and where necessary, get their house in order,” he added.

The sale of PPI will be severely restricted from October 2010, following recommendations by the Competition Commission that lenders should not be allowed to sell PPI at the same time as selling a loan, or during the following seven days.

Earlier this year the FSA made a stand against “single premium” PPI insurance, and told lenders to stop selling it immediately.

This entry was posted on Wednesday, September 30th, 2009 at 3:58 pm and is filed under Banking, Credit, Credit Cards, Insurance, Loans, Mortgages. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.