Progress on loan payment protection insurance 'disappointing'

Financial services companies have been too slow to stop the mis-selling of loan payment protection insurance, according to the Financial Services Authority.

"Progress made by firms in sorting out the issue has been disappointing," said Hector Sants, FSA chief executive.

"We do agree that firms altering their behaviour has been slow," Mr Sants told the Parliamentary Treasury committee.

Mr Sants was answering questions from the Parliamentary treasury committee.

He pointed out that 20 firms had been fined about £12 million, as part of the Financial Services Authority's crackdown on mis-selling.

Loan payment protection insurance policies are designed to provide cover if a borrower cannot repay loans and credit card bills because of illness, accident or unemployment.

UK consumer groups have spent several years campaigning against the sale of loan payment protection insurance. Only last week, the Financial Ombudsman Service  revealed that it was being deluged with complaints about it.

So far this year, it has received 25,000 loan payment protection insurance complaints, making the loan insurance easily the biggest single source of public grievances.

Selling the loan payment protection insurance policies has been highly profitable for banks, but campaigners have said their sale is little more than a protection racket, with consumers often being sold policies they do not need and on which they often cannot claim.

Last week, credit card firm Egg was fined £721,000 and was told it had to compensate customers who had been mis-sold credit card payment protection insurance. It has been calculated that if every customer lodges a claim for the return of their premiums, it could cost Egg nearly £17 million.

Earlier this year, the Alliance and Leicester bank was fined a record £7million for putting pressure on customers to buy loan payment protection insurance unnecessarily.

The sale of loan and credit card payment protection insurance is now likely to be severely restricted following draft proposals from the Competition Commission.

Last month, it said banks and others should be banned from selling the insurance within 14 days of also granting a customer a loan.

This would break the near-monopoly that financial firms have in selling loan payment protection insurance at the point at which they make loans.

The commission's research had previously suggested that banks and other financial institutions, such as credit card providers, had made excess profits of £1.4 billion on loan and credit card payment protection insurance sales in 2006.

In October, the FSA warned it would step up its campaign of reprimands and fines.

A mystery shopping exercise for the regulator found that despite previous warnings from it, customers regularly were still not given the full details of the policies they were buying.