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The internet bank Egg came under fire yesterday from the chief City regulator after it was caught putting pressure on credit card customers to take out expensive loan insurance that in most cases they could not claim or did not need.
The Financial Services Authority fined Egg £721,000 for serious failings in the way it sold payment protection insurance (PPI) to its credit card customers and told the firm to pay compensation, which could amount to several million pounds.
Although Egg, now part of the US bank Citigroup, was not allowed to recommend consumers buy the insurance cover, the FSA found it had instructed sales staff to use hard-sell techniques on those who proved reluctant buyers.
These included over-emphasising the benefits of the cover or telling customers they could take it out for free for a limited period and then cancel. In some cases, Egg applied the cover to a customer's credit card even when they had not agreed to buy it.
Consumer groups welcomed the move, which they said confirmed that PPI misselling ranked alongside the misselling of endowment mortgages and personal pensions as one of the major financial scandals of the last 20 years.
There are more than 18m PPI policies covering personal loans, credit card repayments and mortgages. Several studies have shown that few people claim the insurance, which is sold as cover for loan payments in the event of unemployment or long-term sickness. A combination of high charges and low claim rates has resulted in the banks and other lenders earning huge profits.
A survey by the Competition Commission revealed that only 11% of credit card customers made a claim, and many of them were refused.
In 2006, several high street banks, including Lloyds TSB and Barclays, were understood to be making more than 10% of their total profits from the sale of this one product.
The commission caused a storm of protest across the City last month when it argued that the finance industry had ignored warnings to improve sales practices and increase competition. It said lenders had forfeited the right to sell PPI alongside loans and credit cards and called for a two-week cooling-off period to allow consumers to consider their options.
Egg is the 20th firm to face action in the last year for misselling PPI, following a four year investigation by the FSA, the Office of Fair Trading and the Competition Commission.
The FSA said telephone sales by Egg staff of PPI failed in its standard tests in 40% of cases between January 2005 and December 2007. During that period Egg sold more than 106,000 PPI policies at an average cost of £156.
The FSA's director of enforcement, Margaret Cole, said Egg had used "inappropriate sales techniques" to try to persuade customers to buy PPI.
"It is unacceptable that Egg did not identify the problems with its sales processes despite a series of high-profile FSA communications on PPI, including earlier fines on other firms."
Egg will now write to customers who bought the cover offering them the chance to cancel their policy and get a full refund. The FSA said compensating just 10% of those customers would cost the bank £1.67m; if everyone claims a refund the bank could face a bill of more than £10m.
A statement from the internet bank said: "We are taking the matter very seriously and would like to apologise to any customers who have been affected." It added that only 2% of the sales in question had taken place since the bank had come under the ownership of Citigroup.
- Payment protection insurance
- Credit cards
- UK banking sector
- Insurance industry
- Banks and building societies
- Insurance
- Borrowing & debt
- Personal loans
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