An investigation by Times Money has found that some lenders are still ignoring guidance from the Financial Services Authority (FSA), the chief City watchdog, on selling payment protection insurance (PPI). Despite record fines for mis-selling, more than 10 per cent of lenders are still automatically including PPI in online quotes for loans.

The results of our investigation are particularly embarrassing for the Government. The taxpayer will soon own a large stake in Royal Bank of Scotland (RBS), but the company is the worst offender for including PPI with loan quotes online, a practice that consumer groups say could confuse people into buying cover that they may not want or need. Our investigation also shows that most unsecured loan companies are still selling PPI alongside their loans, against the FSA's recommendation.

PPI is designed to protect borrowers by meeting their loan repayments if they are unable to work because of sickness or unemployment. However, PPI sold with loans has been criticised for being expensive, riddled with exclusions and poorly sold.

The FSA, which oversees the sale of loan cover, has recently started taking a tougher approach with lenders after its own investigation found that PPI was still being mis-sold.

It has fined HFC £1.085 million, Alliance & Leicester (A&L) £7 million, and Liverpool Victoria £840,000. A&L and Liverpool Victoria were fined for the way that they sold PPI over the telephone. HFC was fined for failings in its branches.

The Competition Commission is also investigating PPI and will publish its recommendations in the coming weeks. Its initial findings, published in October, are that PPI is highly profitable, there is little competition on price or other factors, and it is difficult for consumers to search for or switch to alternative products.

Our findings

Times Money checked the websites of 40 loan companies and found that five of them initially offered only quotes with PPI included. With four of these - Direct Line, Lombard Direct, RBS and NatWest - customers wishing to see a quote without PPI have to deselect insurance or move to a different tab. Customers of the fifth lender, Mint, have to click to be shown a quote without PPI. All the companies are part of the Royal Bank of Scotland Group.

While automatically including PPI in online quotes may not break any specific rules, it is far from best practice. In July 2007, the FSA contacted some companies that were selling loans and credit cards online because it was concerned about sales techniques, one of which was automatically including PPI in quotes.

The Financial Ombudsman Service (FOS) also says that most PPI complaints it receives are about mis-selling. This includes PPI being automatically included with loans, without giving the consumer any choice.

Which?, the consumer group, has been concerned about the sale of loan cover for years. Commenting on the findings of our investigation, Teresa Fritz, principal researcher at Which?, says: “It's absolutely shocking that some loan companies are still automatically including PPI in online quotes. This illustrates clearly why the Competition Commission and the FSA need to take action to clean up the sale of PPI. We would like to see the sale of PPI completely separated from the sale of loans.”

Jon Pain, the FSA's managing director of retail markets, says: “Tackling poor PPI sales practices remains a high priority. We willintervene to ensure that consumers are protected and are considering what regulatory powers are most appropriate to deliver fair outcomes. Firms may wish to consider stopping selling single- premium PPI alongside unsecured personal loans, given the continuing problems in the sales of this product.”

The FOS deals with more complaints about PPI than any other product. Emma Parker, of the FOS, says: “We receive about 500 cases a week, which is about 25 per cent of our caseload. Typical complaints are that people didn't realise they had been sold PPI or that they didn't understand how much it cost.”

Costly insurance

PPI is not suitable for everyone - for example, the self-employed and people on contracts. Also, you won't be covered for pre-existing illnesses and you can't claim for redundancy if you were aware that there was a possibility you would lose your job when you took out the cover.

PPI with loans can be very expensive. For example, it can add £3,500 to the cost of a £10,000 loan repaid over five years. Standalone PPI can be bought elsewhere and is much cheaper. However, advisers say that your money would be better spent on an income protection policy that would pay you an income for longer than PPI and is not tied to a loan.

Credit card PPI is even less useful and more expensive than PPI sold with loans. Which? estimates that the sale of credit card PPI is worth almost £1 billion a year to the banks.

If you feel that you have been mis-sold PPI on a loan or credit card, you should contact your lender and make a formal complaint. If you are unhappy with how it is handled, or with the outcome, you can take your complaint to the FOS. Go to the website at www.financial-ombudsman.org.uk, or telephone 0845 0801800.

Best standalone income protection policies

Income protection policies (IPP) will pay out for every month that you are off work. You can choose to receive payments immediately or after a deferred period.

As an example of cost, the cheapest policy for a non-smoking, 35-year-old office manager is £15.90 a month with Pioneer, according to LifeSearch, a broker. It would pay out £1,200 a month until the age of 65, with payments deferred for the first six months.

Pioneer would charge the same customer £17.72 a month with a deferred period of three months, while Friends Provident would charge £29.87 a month.

CASE STUDY: ‘The bank did not say the loan included PPI'

Steve Greenhalgh, from Chesterfield in Derbyshire, feels that he was mis-sold payment protection insurance (PPI) when he took out two loans with HFC Bank.

Mr Greenhalgh took out his original loan to pay off debts in 2004, to be repaid over seven years. Then in 2005, he renegotiated with HFC Bank and took out another loan to repay the first one, and at the same time he also borrowed more money. Both loans included PPI.

HFC Bank charged him more than £1,500 for PPI to cover the £5,000 loan that he took out in 2005, with an interest rate of 22.3 per cent.

Mr Greenhalgh says: “I didn't realise I was taking out PPI with the loans. When I renegotiated my loan no mention was made about it including PPI. On other occasions the attitude of the HFC Bank adviser was very much that I should just sign on the dotted line.”

In 2007 Mr Greenhalgh realised that he was paying for expensive insurance and cancelled his PPI. He complained to HFC Bank and requested a refund of the money he had been charged for the insurance. The bank refused, so he has taken his complaint to the Financial Ombudsman Service and is awaiting its decision.

Since he cancelled the PPI, Mr Greenhalgh has taken out an income protection policy for just £23 a month. It would give him an income of £1,000 a month if he were unable to work.