Payment protection insurance. That might not sound like a familiar phrase to people in most parts of the world (and if it is, it seems totally innocuous). But this is not the case in the United Kingdom. Payment Protection Insurance, or PPI as it is more commonly known, is a financial product that gives loan borrowers insurance for the possibility that they might one day be unable to pay back their loan. Sounds like a sensible product, right? Well, it is. The problem isn’t the product itself, but how it was commonly “Sold” in the United Kingdom.
In explaining the phenomenon, let’s first talk about how insurance is usually sold. Historically, insurance has been sold by salesmen, many of whom would go from door to door hawking their wares. And while this still occurs today in limited capacity (traveling insurance salesmen have a more complex way of going to market these days), modern marketing channels are now the way most people find out about insurance. This complicates matters for insurers because there are now so many kinds of insurance, and so many agreements with which they can be distributed, that people often don’t know about the market possibilities, even if they would be good candidates for a particular kind of insurance.
This is where the sellers of PPI got it wrong. Not content to try to market their product payment insurance directly to loan borrowers, through media channels they would likely see and advertisements that they would appreciate (admittedly no easy task), the insurers decided to force the issue. Colluding with banks and other lenders, PPI insurers buried PPI purchase agreements in the complex financial documents associated with mortgages, automobile loans, and other similar loans.
If you’ve never worked your way through one of these agreements before, it’s hard to appreciate just how long and dense these documents are. For the average homebuyer, a mortgage agreement will run well north of one hundred pages, often requiring signatures or initials multiple times per page. And while the agent monitoring the signing of the loan is required to explain the nuances of each detail, it is common practice for this party to skim over the content, because (let’s be realistic) who really wants to sit there listening to loan details hour after soul-sucking hour?
Insurers knew that by hiding the insurance agreement deep within these documents, most people would sign up without realizing they had done so. And that’s exactly what happened. Thousands of borrowers became insured, whether they wanted to be or not, and regardless of their actual ability to repay their loan.
This was only discovered after multiple people noticed that unknown payments were being taken out of their bank accounts each month. Only after the news spread and the story broke did the insurers and lenders start to have to deal with the consequences of their fraudulent sales. The matter is still very much alive in the courts, and new defendants are joining suits each day. If you have borrowed money in the United Kingdom during the past decade, it might be worth checking your bank accounts for weird transactions. The latest victim of PPI could be you!