UK financial institutions have reportedly repaid consumers USD 59 billion as compensation for mis-selling and mischaracterizing Payment Protection Insurance (PPI), an optional insurance product designed to cover loan repayments.
In Canada, many financial institutions offer a product similar to PPI known as balance protection insurance. While balance protection insurance has not faced the same scrutiny that PPI has experienced in the UK, the similarities between the products raise an important question:
Are the same practices that led to billions of dollars of payouts to consumers in the UK happening in Canada today?
Understanding Balance Protection Insurance
Balance protection insurance on credit cards is an optional financial product that aims to safeguard consumers in the event that they become unable to meet their financial obligations due to unexpected changes in their lives. The insurance covers a portion of the outstanding balance or the minimum payment due, depending on the terms of the policy, during specific life events that impede the cardholder’s ability to make payments. Balance protection insurance may cover consumers in the event of involuntary job loss, disability due to illness or injury, or death. While these situations underscore the importance of having a financial safety net, it is essential that consumers critically assess the value of balance protection insurance and whether it is the correct product for their financial needs.
The Canadian Context
Balance protection insurance is offered by major banks and credit card issuers in Canada. The insurance premiums are usually calculated as a percentage of the cardholder’s outstanding balance. For example, if a financial institution charges a premium for balance protection insurance of $1.00 per $100 of the outstanding balance, an individual with a $3,000 balance would incur a monthly premium of $30.00.
While purchasing balance protection insurance may provide piece of mind for some, consumers should be mindful that monthly premiums for balance protection insurance can add up significantly. In addition, some consumers may be unaware that they are paying for balance protection insurance until they see the premium listed on their credit card statement.
Lessons from the UK: The PPI Experience
The UK faced significant challenges related to PPI, which was designed to cover repayments in case of illness, accident, or unemployment and was commonly sold alongside loans, mortgages, and credit cards. Over time, several issues emerged, prompting public concern and regulatory action. For example, it was alleged that PPI was sold to consumers who did not need it and who were unaware that they were purchasing the insurance. Financial institutions also faced allegations that they collected a substantial portion of the fees paid by consumers as commissions, rather than being used for coverage benefits. In some cases, it was alleged that financial institutions kept the majority of the premiums paid on PPI, making the product disproportionately expensive for the limited coverage it offered.
Implications for Canada
The experience with PPI in the UK offers valuable lessons for Canada regarding balance protection insurance. It is vital for Canadians to recognize potential issues with optional credit card insurance and to take proactive measures to ensure that they are fully informed about the products they purchase.
If you have any information regarding the portion of balance protection premiums that banks and other financial institutions in Canada collect as fees, please email Slater Vecchio LLP at [email protected].
