Analysis By Robert Peston Business Editor, BBC News

Big names will be fined for mis-selling PPI policies

Up to 10 banks and lenders are to be fined for the mis-selling of payment protection insurance (PPI).

In a series of separate announcements over several weeks, some big names will be punished by the Financial Service Authority's enforcement division for failing to give appropriate information when selling PPI.

This is insurance cover against the risk that a borrower may not be able to make payments on personal loans and mortgages - for example, for reasons of ill-health or unemployment.

Three less eminent financial firms have already been fined.

One common sin has been a failure to verify that a purchaser of PPI was not eligible for it at the time of purchase - perhaps because of their age or that they were self-employed - such that sales took place of policies that were null and void from the outset.

Another was taking the premium in one lump, rather than in instalments, without explaining that there were no refunds for early cancellation of the policy or early repayment of a loan.

Guilty

Fines will be around �1m or so, which may seem small given the size of the lenders.

But a guilty verdict may encourage compensation claims from customers who feel they have been mis-sold.

So the financial cost for the lenders could become more significant.

That said, the scale of this business is huge for the big banks.

According to analysts, it earns each of them more than �200m in profits.

And for insurers and banks in toto, it generates annual premiums of about �5.5bn every year.

The number of extant policies is a staggering 20 million-plus.

Other investigations

Be aware, however, that the FSA has not been investigating three separate matters:

• whether PPI premiums are too great - they can increase the cost of a loan by more than 50% and can be equivalent to more than 20% of the value of the loan
• whether the commissions on PPI sales are excessive -up to two-thirds of the entire premium
• and whether there is inadequate competition in this market

Those issues have been referred to the Competition Commission for examination.

But for all the concerns about rip-offs, there is nothing intrinsically bad about PPI as a product.

For many people it is reassuring to know that they will be bailed out of their debt obligations in extremis.

The legitimate questions are about how PPI is sold and for how much.

Real cost of banking

However, here is the real problem for the FSA and the Competition Commission.

There is undoubtedly cross-subsidisation between PPI and personal lending, in just the same way as there is cross-subsidisation between penalty charges on unauthorised overdraft borrowing and "free" personal banking.

Banking history teaches us that if a de facto cap is put on what the banks can earn from PPI, they will recoup the lost income elsewhere - conceivably by jacking up what they charge for personal loans.

As it happens, there may be sound social and macro-economic reasons for making the true costs of borrowing more explicit for debt-addicted British consumers.

But the other lesson from the history of British banking is that when lost income has to be recouped by the banks, it is those who are poorest, relatively ignorant and relatively disadvantaged who tend to pay the price.

If personal credit becomes more expensive and less easy to obtain, it will be those with the lowest and most uncertain incomes who will be harder hit - because that has been the nature of commercial risk management by banks since time immemorial.