A large payment protection insurance industry has developed to help borrowers offset the credit risk they face. A working party led by the Department of Trade and Industry concluded that PPI can “provide valuable protection against changes in a consumer’s financial circumstances”.

Industry estimates for the United Kingdom PPI market put the number of live policies at around 20 million, with between 6.5 and 7.5 million new policies being taken out each year. PPI premiums are said to total approximately £5.3 billion per year. In comparison, property insurance premiums total £8 billion and motor insurance £9.5 billion.

Anyone can lose their job, fall ill, or suffer bereavement or the breakdown of a relationship. A change in circumstances can lead to a dramatic and sometimes permanent, fall in income. For those people with outstanding credit agreements a cut in income raises the serious possibility of unmanageable debt.

The scale and extent of PPI does not necessarily mean that PPI products provide consumers with good value for money, or that the market is working well for consumers. Most borrowers purchase PPI linked to the credit product such as a loan, a hire purchase or consumer credit agreement. Borrowers enter into these secondary sales with little opportunity to shop around and no real choice. As the Financial Services Authority (FSA) has pointed out, there is a danger that secondary sales lead to customers buying products that are poor value.

Stories of the credit industry making large, even excessive, profits from PPI premiums and commission regularly appear in the financial press. For example, the Guardian reported that Barclays made £240 million from PPI sales in 2000/01, with a profit margin of 70 per cent on payments made by consumers. In 2004, the same newspaper revealed that Barclays made as much as 20% of all of its world wide pre-tax profits from PPI, with £7 in every £10 spent on PPI going straight on to the bank's bottom line. Lloyds TSB plc report income in 2004 from creditor insurance premiums of £114 million and commissions from brokering creditor insurance at £377 million.

Two different estimates suggest that PPI premiums are about four times the cost of providing cover. This implies that borrowers generally could be overcharged by as much as £4 billion per year for PPI cover.

Evidence suggests that both the sales process and design of PPI products fail to meet the needs of many customers and often just increases their indebtedness, particularly in relation to debt consolidation. Published figures suggest that the limitations of the policy have meant that customers could only make claims for just over a quarter of the debts which they believed were covered by the insurance policy.

A Citizens Advice Bureau in Greater Manchester reported that a woman with multiple debts had taken out a consolidation loan for £20,000 to deal with them. Later the client read the documentation and realised that she had actually paid £27,000, as the loan included payment protection insurance and that interest on the PPI ran at the same rate as the loan itself. When she investigated further she saw that her monthly repayments were £284pm over 300months, which meant that she would have to pay £85,200 over the course of the agreement. By this time, the period within which she could cancel the agreement had expired.

The above example is typical. Often the consumer is not even aware that they have bought PPI or they have been told that the loan is dependent on them taking out PPI, which the Financial Services Authority makes clear should never be the case.

In June 2005 Cardiff Pinnacle, part of the global banking group BNP Paribas, wrote to 2,600 policyholders telling them that their SalaryProtect cover would be terminated. The plan, designed to pay out if policyholders lost their jobs, was closed on 20th July. Customers were given only 30 days’ notice. Policyholders who tried to claim after July 20 were turned down automatically, no matter how long they had been paying their premiums. Pinnacle told customers it was no longer prepared to provide cover because it had been overwhelmed by claims.

Hire purchase, conditional sale and loan agreements are commonly sold with PPI, which is usually sold as a one-off premium added to the credit agreement. When consumers exercise their right to terminate the hire purchase or conditional sale agreement they are told that the PPI policy cannot be cancelled. The borrower usually pays a one off, up front PPI premium funded by additional borrowing charged at the main agreement rate. Lenders are refusing to terminate these ancillary loans or bring about the refund of premiums.

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