A new overcharging fiasco hit the banking sector yesterday as Bank of Ireland admitted it had mistakenly overcharged 65,000 customers on payment protection insurance since 1989.
The bank expects that the total value of the refunds to affected customers could be as high as €15 million, including interest.
The bank identified the overcharging during the course of an industry-wide investigation into the sale of payment protection policies by the Irish Financial Services Regulatory Authority (Ifsra).
The error arose when personal loan customers who had opted for payment protection insurance to cover their loan later paid off the loan ahead of the agreed repayment period.
The payment protection premiums were lumped in with the main loan repayment, so when customers paid off their outstanding balance early, they also paid the insurance premiums relating to the remainder of the term, when there was nothing left to insure. They should then have received a refund of the unused payment protection premiums.
Ifsra's consumer director Mary O'Dea said yesterday that there was a need for controls to be tightened in cases where manual intervention in automated banking processes was required.
The regulator, which is still in the middle of its investigation, is alarmed by the high uptake of the policies at branch level and the low rates of successful claims.
A series of inspections of banks conducted in late 2004 revealed that around 50 per cent of applicants for personal loans also took out the insurance, a product that would cover repayments on the loan for up to 12 months in the event that the borrower suffered a specified illness or was made redundant.
At some banks, the rate of successful claims was as low as 1 per cent of all policies sold.
"Our concern is that people would not fully understand what they are getting involved with," a spokesman for Ifsra said. "One of the main questions consumers should ask themselves is whether they really need this product."
Ifsra plans to introduce a number of measures in its consumer protection code to ensure that borrowers are aware that the insurance is strictly optional and that lenders isolate the price of the insurance over the full-term.
On a personal loan of €10,000 repaid over five years, the cost of payment protection insurance ranges from €1,001 to €2,153 at different lenders. This type of insurance is also sold to credit card and mortgage customers.
Bank of Ireland has sold payment protection policies with 470,000 of the 1.5 million personal loans it has issued since 1989. Of these loans, 170,000 were repaid early.
Although it has not yet completed its investigation, Bank of Ireland estimates that 65,000 of these customers were not refunded the unused portion of their policy.
