Do you really need payment protection insurance?

The rip-off sale of payment protection insurance, highlighted regularly by The Herald, is back in the spotlight after this week's decision by the Office of Fair Trading to refer the sale of PPI to the Competition Commission.

It follows the Financial Services Authority's £610,000 fine last week on GE Capital Bank, a major supplier of store card PPI to leading retail chains.

Meanwhile, a campaign begun by Ian Reid, a 48-year-old service engineer from Dundee, encouraging consumers to claim refunds when they have been mis-sold PPI, is gathering pace.

Reid received a full refund of £415, in an "ex gratia" payment from a high street bank, after threatening to go to the small claims court in Scotland. Reid had been mis-sold PPI with a £1500 loan in 2005, when he was not told clearly that the insurance, which had been included in his repayments, was optional. The PPI premium added more than £10 a month to his £36 repayment.

He said yesterday: "The first letter they sent me said they were sorry I was unhappy. A couple of weeks later I got a phone call saying that as a gesture of goodwill they would offer me £140. I decided to go for the lot, and faxed them a reply, turning down the offer and saying I would take them to court. About two hours later I got a call saying they would pay the whole claim."

Reid has now lodged English court papers claiming a refund on another policy, from GE Money, a subsidiary of GE Capital Bank, after working out that the PPI had cost him more than £4500, including interest, over five years on a loan of £17,000. He has now settled the loan early, but over the full term, the PPI would have cost him £18,200 - more than the loan itself - because of the way interest was added on.

Reid's case is now attracting a lot of attention on the website of the Consumer Action Group, which provides template letters for complaints against banks, largely on excessive current account penalty fees.

Reid said: "I realised I'd been taken for a very expensive ride, so I decided to look online for an alternative and found I could buy stand-alone cover from Paymentcare.co.uk for a fraction of the price, saving myself nearly £40 a month."

Shane Craig, managing director of Paymentcare, said: "Many of our clients have told us that they believe they have been sold overpriced and inappropriate PPI and want to see something done about it."

Low-cost providers have long campaigned for a ruling by the OFT that lenders should not be allowed to cross-sell PPI with loans and credit cards at the point of sale.

"PPI sold as a single premium with interest added on upfront is never in the consumer's interest," said Craig. Good policies should be paid for monthly and offer 30 days' notice of cancellation. "Not everyone has Ian's tenacity and ability to fight back against these powerful institutions," he added. "Consumers need to be protected from overly forceful sales techniques and made aware that there are affordable alternatives. It's a sad indictment that it could take massive fines by the FSA to make the big name offenders improve their sales procedures for PPI, but it could be the only way to ensure that consumers are treated fairly."

The Competition Commission will now investigate the low ratio of claims on PPI policies, which make them so profitable for the banks, the high commission rates, and price variations. Simon Burgess from British Insurance, one of the cheapest providers in the market, commented: "I'm delighted that moves are underway to stop these under-hand selling tactics."

Kevin Carr, at independent adviser Lifesearch, which has just started providing free consumer advice on a range of insurance products for Asda, commented that income protection policies were easier to recommend than PPI.

"The key thing is what is the definition for unable to work'. All PPI policies are based on "any" - you have to be unable to do any type of work whatsoever."

Good income protection plans pay out on "own occupation" - when you are unable to do your own specialised job.

Carr said: "It doesn't take much to be wrong with you not to be able to work as a surgeon or a concert pianist." He said the tiny Pioneer Friendly Society was now offering a policy which gave "own occupation" to any applicant. "You will have to pay a price for it ... but it challenges the consumer mindset that the big brand is everything."

The latest independent research has confirmed huge variations in the cost of PPI on credit cards, which will no doubt interest the Competition Commission.

Moneyfacts scanned 281 cards, all promoting PPI as an add-on sale, and found the cost per £100 of cover ranging from 45p to a mind-boggling £1.50.

Credit card PPI is paid on a monthly basis, calculated at a price per £100 of the outstanding balance of your card. So even if you repay your balance in full, the insurance premium will still be payable based on your statement balance, as "cover" has been in force for that previous month.

Terms and conditions vary between providers, but typically the insurance will cover accident, sickness, unemployment, life cover and often hospitalisation benefit. Normally the policies will include a "qualification period" and require you to be unable to work for a period of between 14 and 30 days before a claim can be made.

Exclusions typically include pre-existing medical conditions and in some cases back pain and stress-related illness - two of the main causes of work absences.

Even if you claim successfully, there is normally a ceiling of 12 monthly payments (if you remain off work), at either the minimum payment or a set level of 3% to 10% of the balance outstanding.

Michelle Slade, analyst at Moneyfacts, said: "When signing up for a new credit card or store card, check that you have opted for the insurance only if you really want to, and have the full information available.

Sales staff are highly targeted to sell PPI, so could be very insistent. But also remember that as it is paid on a monthly basis, subject to cancellation terms, the policy can be cancelled at any time."

She went on: "Remember, you don't have to buy your credit card PPI cover from your card provider; you can purchase this insurance from a standalone independent broker such as www.paymentcare.co.uk. Perhaps look to review any existing life or income protection policies - these may do the job equally and if not better, at a much more competitive rate."