Banks and building societies came under fire for “serious failures” in the sale of loan insurance yesterday after an investigation by the Financial Services Authority (FSA).

The City watchdog said that it was “extremely disappointed” that dozens of institutions had failed to clean up sales of payment protection insurance (PPI) and targeted four for further scrutiny. It said another 20 could face a follow-up investigation.

Lenders that fail to improve sales face a fine or could be forced to stop selling the policies. Hadenglen Home Finance, a mortgage broker, was fined £133,000 this month for selling policies that customers might never have been able to claim on.

PPI, designed to cover times when borrowers are unable to meet their loan repayments, has been attacked for being an unsuitable, overpriced and inflexible type of insurance. However, debt and consumer groups yesterday criticised the FSA for refusing to “name and shame” and for not taking strong action.

Teresa Fritz, of Which? Money, the consumer magazine, said: “It is shocking that, despite lenders’ assurances that they will clean up their act, PPI is still being mis-sold to such an extent. We want the FSA to name and shame offending lenders so that people are aware of which companies are breaching the rules.”

Peter Tutton, policy adviser at Citizens Advice, which launched a campaign against the PPI industry two years ago, said: “It is time for the FSA to take stronger action to ensure that the selling rules are adequate and that firms actually follow them.”

Lenders have been criticised for using the policies, which make an estimated £5.5 billion a year, as a cash cow. Britannia Building Society, the AA and Intelligent Finance offer some of the most expensive policies, while Leeds Building Society offers the cheapest, according to Moneyfacts, the price comparison website. On a £10,000 loan over five years, a borrower with Britannia would pay almost half the total loan amount in PPI at £4,189.80, compared with £1,473 at the Leeds.

The FSA said that while there had been improvements, many sellers are not explaining the cost, or what the cover is for.

Research by Capital Blue, an independent market research firm, found that more than 30 per cent of borrowers still feel under pressure to buy insurance when they take out a loan.

Clive Briault, FSA managing director of retail markets, said: “We are extremely disappointed that some firms have still made little progress in improving their sales practices.

“The right PPI can provide valuable protection but consumers are entitled to expect that they will be treated fairly. They must be told how this product works, what it covers and how much it costs.”

How PPI works

–– Also known as accident, sickness and unemployment insurance, payment protection insurance covers repayments on mortgages, loans and credit cards if the borrower cannot meet them through redundancy, accident or illness, usually for 12 to 24 months

–– Borrowers pays single or monthly premiums. Single premiums, whereby a lump sum of three to five years of premiums is paid in advance, are the most controversial because the premium is added to the loan, attracting interest and costing more

–– Stress, back problems and any preexisting medical complaints may not be covered. The self-employed are often excluded

–– To claim for unemployment, the borrower must have been employed for the past 12 months continuously by the same employer on a permanent contract

–– Policies are optional and can be cancelled, with a refund, within 14 or 30 days of taking it out

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax