| 12.4°C Dublin

Bankers have done it again in insurance blunder

Over the coming days tens of thousands of borrowers will be receiving letters from their banks telling them that they may have been mis-sold payment protection insurance (PPI) on their loans. Payment protection insurance policies continue the repayments on a loan when the borrower becomes ill or loses their job.

It is different from mortgage protection insurance, which the banks insist all homeowners take out. Unlike mortgage protection insurance, which only pays out if the homeowner dies and is relatively cheap, payment protection insurance is expensive.

Which is partly what attracted the banks. Expensive insurance means high commissions. During the boom years, when it seemed as if just about anybody with a pulse qualified for a loan, the banks, eager for the commissions which it generated, pushed unsuitable payment protection insurance on borrowers who were in no position to resist their lender's "suggestion" that they purchase PPI when taking out their loan.

Then when the economic tsunami first struck four years ago and borrowers began to lose their jobs by the tens of thousands many of them not unnaturally began to submit claims on their PPI policies.

Imagine their shock when the insurance companies, on whose behalf the banks sold PPI, rejected most of these claims out of hand.

Turns out that the terms under which PPI policies would pay out were very tightly drawn. The vast majority of PPI policies specifically excluded self-employed people.

Most of them also had acres of small print restricting policyholders' ability to make claims if they became unable to work through illness.

However, this didn't stop the banks selling PPI to self-employed people or to other borrowers for whom such products were clearly unsuitable.

What is now happening in Ireland is a mirror reflection of what has already happened in the UK.

Banks across the water have already set aside £1.9bn to cover claims of PPI mis-selling and most analysts reckon that they will have to provide a further £5bn to cover the full costs of the scandal.


Now the Central Bank has ordered seven banks to write to customers sold PPI since August 2007 warning them that they have been mis-sold PPI. The seven banks are AIB, EBS, Bank of Ireland, Permanent TSB, GE Money and Ulster. A seventh bank asked not to be named and, incredibly, the Central Bank agreed to spare its blushes.

For what it is worth, I reckon that it can only be one of three banks, all foreign-owned. In the meantime we would like to hear from any bank which didn't mis-sell PPI so that we can exclude them from our inquiries.

With 340,000 PPI policies having been sold over the past five years the total cost of fixing the mess has been estimated at €600m with the average payout likely to be in the €2,000-€3,000 range.

So what should you do if you think you have been mis-sold PPI? One thing you shouldn't do is sign up with one of the agencies that have sprung up promising to manage your claim for a fee, usually about 25pc. Most of these cases are open and shut. Wait and see what your bank offers first.

And what about the bank bosses who ordered their staff to sell these clearly unsuitable policies, stiffing the taxpayer, who now owns most of the banks, for yet another massive bill?

Apart from the handful who have been despatched into lucrative retirement most of them are still in situ. Being an Irish banker means never having to say you are sorry.