Case of the insurance policy that never was

Reader Patricia McManus, of Livingston, was horrified to be told by her insurer that the credit insurance policy she and her husband had taken out to cover a joint personal loan would not pay up when she was made redundant from her job, because she was the second-named person on the contract.

McManus said: "This was never mentioned at the time. We both signed a joint loan agreement, and signed for the insurance. Only now when we come to claim do they say only my husband is covered."

Problems with payment protection insurance (PPI) have been a running sore for consumers and the banking industry for at least a decade. Credit card and personal loan customers were often charged an insurance premium without ever being told about it.

Even when the charge was disclosed, these policies, supposed to meet loan repayments if you are unable because of sickness or redundancy, were often worthless. Full of exclusions they proved difficult to claim against and would not pay up if you were self-employed or had certain pre-existing conditions, for example.

Just about every regulator has been involved in trying to sort out the mess that PPI has become. Five years ago, the Office of Fair Trading investigated, after a super complaint was made by Citizens Advice Bureau. It referred the matter to the Competition Commission.

The Competition body's conclusions were damning. It decided this cover was "extremely expensive", and was critical of the way it was sold, including the incentives staff were given to sell it.

It recommended a complete prohibition, preventing contracts being sold at the same time that a loan was taken out, so that customers would not be talked into buying inappropriate cover and could think it over more carefully and consider alternative options.

Some of the banks appealed, and the Competition Commission was ordered to produce more evidence. This work is now nearing completion.

A spokesman for the commission said: "We have been very strong in our criticism of this insurance. But it does seem to be taking an inordinate time to sort this all out."

Meanwhile, the Financial Services Authority took over regulation of these policies in 2005 and, after three detailed reviews, demanded reforms to ensure these policies were fairly sold and customers were made fully aware of any exclusions.

However, it has struggled to get banks to comply even though it has banned single-premium policies, fined 24 companies 13 million and visited 200 firms in all in an attempt to get the point across.

But still banks have refused to treat customers fairly. The latest data shows that institutions are routinely rejecting half of all PPI complaints made by customers. Yet when borrowers pursue their grievance to the Financial Ombudsman, which 115,000 people have done to date - 13,500 in the first three months of this year - more than 80 per cent win the case.

The FSA has now produced yet more guidelines on how to handle complaints and has given banks until December 1 to comply.

Patricia McManus has appealed to the Ombudsman after Clydesdale Bank stonewalled her claim. She and her husband had approached the bank nearly five years ago for advice about their credit card debts, other loans and mortgage.

She said: "We were both in work and with good earnings at the time, so we were on top of our payments. We just wanted advice from the bank manager about the best thing to do."

The Clydesdale manager put them in touch with an adviser who recommended consolidating the debts into one 13,000 personal loan and remortgaging. He also recommended taking out sickness and unemployment insurance on both loans.

They signed up for a policy to cover the five-year loan with London & Edinburgh, which cost 57.33 monthly to protect monthly mortgage bills of 267.

The loan should have been repaid this month, but in January Patricia was made redundant from her job as manager of a training centre for sea cadets at the Marine Centre in Prestwick.

She said: "It was just bad luck. It was a charity, and because of cutbacks, they decided to close two centres, one in Scotland and one in England. I'm 60 now, so getting a job is very hard, and because of my age, I don't qualify for jobseekers' allowance."

She made a claim on the insurance policy, and at first everything was fine. It paid out for one month. However, she then received a letter, advising her that as she was second-named on the contract, only her husband was covered.

She said: "I was appalled. This was the first I had ever heard of this. We had signed a joint loan agreement, and as far as I was concerned it was a joint insurance contract. Nowhere on the papers I signed did it say only the first-named was covered."

Clydesdale rejected her appeal, arguing information had been stipulated within the package of paper given to them.

Joint accountholders have to take extra care because equal rights are not necessarily always granted to both. With joint credit cards, for example, only the first-named person enjoys the protections offered by the Consumer Credit Act, which gives them a claim against the card issuer if goods or services fail to satisfy.

A spokesman for the Ombudsman said that when it came to PPI, contracts differed. Some did offer equal protection to both partners, but some contracts covered only the first-named. The Ombudsman has received a number of similar complaints and ordered the bank to pay up in some cases, depending on the information provided initially.

Meanwhile, a spokesman for Clydesdale Bank, declined to comment.

He said: "This case is currently under review, so we are unable to comment further at this stage."

Dan Waters, the FSA's director of conduct risk, said: "Today is the culmination of months of hard work and now, with these measures, we look forward to consumers being treated fairly whether they are buying or complaining about PPI.

"Since we took over the regulation of PPI we've carried out 24 investigations and three thematic reviews, issued warnings, halted the selling of single-premium PPI with unsecured personal loans, visited over 200 firms and handed out some very significant fines. Now, with this package of measures, we're confident we can mend a market that has been broken for too long.

"This remedy is fair to consumers and the industry alike. The onus is now on the industry to ensure it treats all customers fairly. We will be monitoring the implementation of our guidance closely to ensure real change is delivered."