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Banks have increased their onslaught of credit card customers to offset losses due to increases in bad debts and the cap on overdraft fees.

“The tactics used include the magically appearing annual membership fees, charges for pseudo-cash products such as credit-card cheques, and hidden catches in balance-transfer deals.

The banks have been playing a sleight-of-hand game with their consumers for years. Now it has stepped up to levels that catch most consumers off-balance. In fact, many consumers build up hundreds of pounds of ‘hidden’ charges before they catch onto the bank’s ploy.

One of the biggest tricks is the five pound scheme. The credit card has no minimum balance each month.  Instead of a minimum monthly repayment the customer pays the monthly interest, plus premiums for payment protection insurance, plus fees, plus £5. However, this means that the average person never actually repays any of the capital from one year to the next.

Another scheme pays of the least expensive debt first.  The more expensive debts accrue more interest for longer periods – and of course, the interest is often calculated on the full total of the purchase until paid in full.  This means that all the small purchases are repaid quickly, leaving the large payments languishing on the card for months, or years.

Credit card, and most unsecured loan debts, have higher interest rates than personal loans.  Some unsecured loan debts are currently as high as 25%, and expected to increase at least one more time this year.

There are many borrowers who have taken out payment protection insurance on their loan, not knowing that it was not a mandatory requirement.  Although lenders may pressure you into taking out payment protection insurance, they do not tell you that most loans do not require you to have payment protection insurance.

Payment protection insurance is an insurance policy on your loan where you pay a specified amount each month for the purpose of the event that you may not be able to make your monthly repayments due to illness, an injury, or an involuntary redundancy.  If this does occur, the payment protection insurance should cover your expenses, and with some policies the insurance will also pay of additional expenses.  This can be reassuring for some borrowers, and especially reassuring for lenders, as it is a form of security ensuring that they will receive payment on the loan.

There have been reports, however, of borrowers who have been pressured or led to believe that the insurance coverage was a requirement, only to find out that the payment protection insurance that they currently have in place is unsuitable for their loan or unnecessary. This can happen if the lender is not completely honest with the borrower, or the borrower is not made aware of the insurance.  There are some cases where the borrower does not realise they are paying for the payment protection insurance until they are far into the repayments of the loan.  That is why it would be best that you read over the loan documents carefully before signing, and asking questions for any unknown charges.

If the lender does in fact require that you take out payment protection insurance, you may want to shop around for standalone policies.  You may find that there are some policies that are cheaper, and even better than those your lender is offering.

The top five selling personal loans in the UK at the moment all have interest rates of below 6.5 per cent. The Moneyback Bank offers an online loan at a rate of 5.9 per cent. Alliance and Leicester also offer a personal loan at the same rate of 5.9 percent. Slightly higher, coming in at 6.1 percent, are the personal loans from Halifax and Northern Rock. First Plus Exclusive offers a loan at 6.3 percent.

All of these rates are for online applications, although some of the lenders offer a range of application methods. The loans will only be approved for borrowers with good credit rates. They are also offered on a secured basis to homeowners. If you are looking for loans on an unsecured basis the rates are likely to be a little bit higher.

The Moneyback Bank offers you the option of earning back a proportion of the money that you spend on payment protection insurance. However, it is probably not advisable for all customers to opt for payment protection insurance in the first place. Alliance and Leicester now offer a fully automated online service which means that you can finalise the entire loan online and get your hands on that money faster. The Northern Rock 6.1 percent rate is fixed, while the Halifax loan offers a three month repayment holiday for the first three months of the loan.

There are a lot of insurance products available these days. However, one new one that has attracted some amount of attention is payment protection insurance. In fact, this single product is making credit and financial service providers billions of pounds in profit each year.

The way payment protection insurance works is you are charged a set amount for every one hundred pounds you owe per month. For example, if you are charged one pound for every one hundred you owe on a credit card, then if you have five hundred pounds outstanding on the card, you will be charged an extra five pounds a month for the insurance.

The benefit of the insurance is that should be become unable to keep up with your repayments, the insurance will step in to make them for you.

However, there are certain severe limitations to payment protection insurance that you should be aware of before you sign up to it. First of all, the insurance will only make the minimum repayment. Therefore, there is little chance that the insurance will ever fully repay the money you owe. Just keep it under control for you.

The other limitation with payment protection insurance is that it will only pay out in very limited circumstances. If the reason you cannot meet the repayments can in any way be attributed as your own fault, for example if you quit your job or were fired for misconduct, then you will not get any benefit for the insurance. Therefore, it is important to ask yourself if you will get anything for the money you spend on payment protection insurance.

The Motley Fool reports that credit card lenders are likely to respond to the halving of their profits over the last five years. This has resulted from the increased number of rate tarts moving from balance transfer to balance transfer as well as the rise in bad debts. UK consumer debt rises by £1 million every four minutes, according to some statistics, and is now in excess of £1 trillion. The recent £12 cap imposed by the Office of Fair Trading on default charges has also hurt the lenders.

The Motley Fool points out that there are several strategies credit card lenders can use to recoup their money. These include the reintroduction of annual fees, higher fees for cash withdrawals and higher interest rates. With the Bank of England base rate now at 5 per cent, its highest level for some time, and expected to rise again in the New Year, interest rates for credit card purchases and cash withdrawals are likely to rise soon.

Other tactics that lenders might use include introducing more features that have to be paid for, such as identity fraud insurance, card protection insurance and payment protection insurance. There are also likely to be rises in balance transfer fees. These are now around 2.5 to 3 per cent of the balance transfers, most of these uncapped.

Cashback rates could also fall while the cost of taking money out abroad could rise. Interest free periods could also be reduced from the standard 45 to 59 days. Loyalty and reward programs could also be scaled down or cut altogether.

High street banks are discussing making Mortgage Payment Protection Insurance (MPPI) compulsory, according to releases from talks between debt charities and mortgage lenders.  This move is in reaction to the increased level of missed mortgage payment, and lost income due to IVAs and Bankruptcies.  The mounting debt carried by UK homeowners, has prompted High Street Banks to start discussing the MPPI.

The purpose of the MPPI is not to help homeowners survive financial hardship, but to help the banks recoup loses in revenue. Media speculations suggest that the new plan would add a heavy burden to homeowners.

Currently, less than 24 per cent of homeowners carry an MPPI policy.  These policies are in place to help homeowners.  A homeowner who looses their job must wait nine months before qualifying for any State help with the mortgage from Income Support Mortgage Interest payments, and this is not available if the homeowner has £8,000 in savings.

The Treasury has joined the talks, and is debating whether to force banks to make the insurance compulsory. At the moment, there are insurance companies that offer MPPIs for a fraction of the cost that High Street Banks charge. However, if the Treasury makes MPPIs compulsory, the market may see a drastic increase in the cost of a policy.

Lenders are reluctant to foot the bill. They will simply add the cost of the insurance to the mortgage repayments. The only one who will win in this situation is the High Street Banks and the Government.

Liverpool Victoria has launched an intelligent online processing system for their flexible protection plan, mimi, which will allow financial advisers to apply online for their clients’ protection needs in a hassle-free way.

Called straight through processing (STP) the new system lets advisers choose cover for mortgage payment protection, income protection, critical illness and life. Advisers can complete applications online and can also get instant acceptance and policy tracking. The system also allows advisers to review previous cases and to produce illustrations.

STP allows advisers to receive quicker decisions and clients will be contacted directly, reducing the need for reports from GPs and avoiding processing delays. There are two application routes. The short form option allows advisers to enter basic client information. Within 10 minutes the application goes to a telephone interviewer who completes the rest of the questions with the client. The normal route allows advisers to complete risk and medical details on clients’ behalf and the system uses rules based decisions to give immediate decisions.

Stuart Tragheim, Director, Intermediary Business at Liverpool Victoria, said: ‘Our new STP system demonstrates our commitment to making the life of the adviser easier.  Any technology that can be put in place to speed up policy applications is a positive step, and the ease and breadth of choice of cover available through the mimi Flexible Protection Plan means advisers can find quick and individual solutions to their clients’ needs.’

STP can be accessed directly through Liverpool Victoria’s IFA website or through portals such as The Exchange, Webline and Assureweb.

The Financial Services Authority has fined Loans.co.uk £455,000 for failing to treat its customers fairly when selling payment protection insurance (PPI). The FSA found that the company did not have the appropriate systems and controls in place to lessen the risk of making unsuitable sales. Loans.co.uk sold PPI over the telephone, but did not gather and record information to show that the recommendations it made were suitable. Customers did not receive enough information to make an informed decision about the PPI policy being offered and therefore could not be sure they were recommended the right option for them. This was estimated to affect approximately 14,400 customers.

Margaret Cole, FSA Director of Enforcement said: ‘We have highlighted Payment Protection Insurance as an FSA priority due to the potential level of risk to consumers. Loans.co.uk Limited failed to make sure adequate processes were in place to ensure the suitability of its PPI recommendations and treat its customers fairly. The principle of Treating Customers Fairly should be embedded in firms’ business models to help prevent such failings and it is important that all firms review their systems and controls to reach this standard.’

The FSA also found that the company did not have appropriate compliance monitoring procedures in place to identify failings in the sales process and there was no guidance to staff on how to identify and handle a complaint.

Stephen Hayes, CEO of Loans.co.uk commented:  ‘Loans.co.uk is committed to providing its customers with a high level of service. We co-operated fully with the FSA and undertook an internal audit review to ensure effective and timely resolution of the issues identified.  New practices have been in place for the past six months’.

Payment Protection Insurance Products are back in the news.  The battle between government, borrowers, and the lending companies is far from over. The chairman and of the Financial Services Authority  (FSA) heard MPs voice their concerns over ‘dodgy’ PPIs. Chairman Sir Callum McCarthy and chief executive John Tiner appeared before a Treasury committee and agreed that PPIs did not work in to the consumer’s benefits. 

Under some definitions, the PPI could be called a money grab, or even piracy. The Office of Fair Trading dealt the banking industry a major blow when they referred the market for PPI to the Competition Commission.

Banks currently sell loans, and then sell PPIs that can equal up to one third of the loan. This scheme generates them more than 5.5 bln stg.

Labour MP Angela Eagle brought up the topic of sales based on commission and incentives that resulted in consumers being sold products they did not need or that would not pay out if customer became unemployed.

‘Doesn’t it come back to the business model,where there’s a lot of hidden stuff going on and people who are selling these very dodgy products are actually on huge commissions and they’re basically ripping off customers?’ she asked.

The OFT said the insurance promises ‘peace of mind’ for borrowers. The plans guarantee that customer’s debts will be paid in the event of sickness, accidents or unemployment. However, the contracts are ‘overly complex’. There is no way the average consumer can be expected to understand what they are borrowing.  In the end, the PPI provides ‘less protection than customers believe they paid for.  

The FSA is considering action against 10 PPI firms. The only good news is that consumers will find borrowing secured loans up to one-quarter less without the PPI attached when the battle is over, or they will receive a PPI that delivers what it promises.

The Association of Mortgage Intermediaries (AMI) has commented on the recent findings on payment protection insurance (PPI) from the Financial Services Authority (FSA) and the Office of Fair Trading (OFT). The OFT had concerns about competitiveness within the PPI market and is considering referring PPI to the Competition Commission next year, while the FSA review found that some firms selling PPI were failing to treat customers fairly.

According to Mortgage Strategy, AMI has expressed disappointment that mortgage payment protection insurances has been included in the OFT’s proposed referral to the Competition Commission.  The OFT’s report covers first-charge MPPI, second-charge PPI, unsecured loan PPI, credit card PPI, and store card PPI. Only store card PPI may be excluded from the referral.

AMI says that MPPI is a different sort of product from regular PPI, a fact acknowledged by the FSA. Rob Griffiths, associate director of AMI, said: ‘We are fully aware this is an area in which standards need to be raised and have been working with FSA to do this. AMI has highlighted the areas of concern in this sector and issued a PPI checklist to members to help clarify the issues they need to address when advising customers.’

The Council of Mortgage Lenders (CML) was also surprised about the OFT decision, given that ‘ its market study points out differences in terms of greater access to stand-alone cover than in other PPI sectors’, said director general  Michael Coogan.

AMI has formulated a PPI action plan which it says shows its commitment to address the issues raised by the reviews.