Jeff Salway: Growing pressure for action over dodgy PPI claims handlers

IF YOU wondered why temperatures rose so suddenly on Tuesday morning, it might have something to do with the gleeful rubbing together of hands in the claims management industry as the City watchdog told banks to step up the hunt for potential PPI mis-selling victims.

Nearly a year after losing a High Court challenge against rules forcing them to review past sales, the banks must now tell customers who may have been mis-sold PPI (payment protection insurance) that they could be entitled to compensation.

If the banks thought they’d seen the worst of it, having paid out some £1.9 billion in PPI mis-selling compensation last year, they were wrong.

The letters the Financial Services Authority now wants them to send out could trigger around £3bn of claims on top of those already paid or currently being processed.

To recap very briefly, PPI is designed to cover people’s loans in the event of them losing their income due to illness or unemployment. The product itself is fine; when sold on its own and not alongside the loans it is intended to cover it has proved valuable.

Yet the greed of the financial services industry took over. Millions of people were conned into taking out the policies, including those who would not be able to claim in any event. Many had the policies added to their loan contracts without being told, or were threatened with having their loan offer withdrawn if they didn’t also take out the insurance.

This sorry episode encapsulates so much that is rotten in the banking industry. It may yet prove a turning-point if it leads to genuine reform of the short-term sales culture that has done so much to erode trust in high street banks.

There’s one knock-on effect that is not being given sufficient attention, however, and that’s the way in which claims management companies have exploited the PPI scandal.

These are the companies bombarding millions of us with adverts, e-mails and texts telling us to apply for PPI compensation. I get them on a daily basis and, given they haven’t yet got my name right and I’ve never taken out PPI, it’s fair to say they take a scattergun approach to their work.

Yet it succeeds. Around eight in ten of the PPI complaints received by the Financial Ombudsman Service (FOS) are a result of claims management referrals.

The FOS has repeatedly stressed that going through a claims handler makes no difference to the chances of success. Yet millions of people are giving up to 30 per cent of their compensation to claims management companies. With the total PPI bill now set to top the £10bn mark, it’s a lucrative business.

The practices of claims handlers were raised in the House of Lords on Monday, Lord McNally hitting out at the “very dodgy practices” by the firms.

He called on the government to take action. That need became more urgent the following day, with the FSA’s latest instructions to the banks.

The FSA claims management rip-off is in danger of causing a stink to rival the scandal from which the firms are so handsomely profiting and it’s about to get even worse.

Combine an ageing population with a dramatic plunge in the value of the annuities used by most people to convert their pensions into a retirement income and the last thing you need is a system in which millions are unable to get the best deal on the table.

Over the past decade, retirees have missed out on some £7 billion of potential income by settling for annuities inferior to those available from other pension companies, Oxford Economics estimated last year.

That’s because of a difference of up to 20 per cent between the best and worst annuities available on the market.

Then there are the enhanced annuities available to the growing population of pensioners with some form of health or lifestyle conditions that undermines their life expectancy, which could boost pension incomes even further.

There’s finally been some good news on this front, however. A new code of conduct unveiled by the Association of British Insurers this week requires its members to do more in the information they send out ahead of a customer’s retirement to highlight the value of shopping around for an annuity.

It doesn’t go far enough – we’ll eventually get to a point where shopping around is the default option – but it’s progress. As is Nationwide Building Society’s launch of a new annuity brokerage service last Monday.

The big plus point here is that Nationwide will give advice to those with pension pots as low as £18,000 (below the average pension savings of £25,000). This is a market in which advice is woefully inadequate, meaning those who most need the best annuity deals are the least likely to get them.