Payment protection insurance market faces overhaul

A major crackdown on companies selling payment protection insurance (PPI) has been proposed following a damning provisional report by the Competition Commission (CC)—which says customer overcharging could be hitting more than £1.4bn a year.

The possible remedies put forward by the CC include banning the sale of PPI at the credit point of sale, prohibiting the sale of single premium policies, the imposition of price caps and the publication of claims ratios.

Both the findings and the remedies are provisional and do not represent the CC’s final decision. However, says, Wragge & Co partner, Simon Taylor, they present a clear statement of intent and a stern warning for the PPI industry.

“There is much still to play for but the PPI providers will now be on the defensive,” he says.

Most of the UK’s 14m+ PPI policies are sold as a consumer takes out a loan or other type of credit, the report says, with many consumers unaware they can buy PPI from other providers. This makes it difficult for other providers to reach these customers and in the absence of such competitive pressure, the distributors—such as banks, mortgage providers and credit card providers—can charge higher prices.

CC deputy chairman, Peter Davis, says: “We’ve found serious problems with the PPI market and customers are paying for the lack of competition.

“The way PPI is sold as an ‘add-on’ to a loan or other credit product means distributors escape the pressure they should face from competing suppliers.

“Distributors don’t appear to compete much with each other on either price or quality of PPI; neither do they appear to do much direct advertising of PPI to win customers from each other. “

Taylor says there must be real concerns that some of the more draconian remedies envisaged could severely undermine the albeit imperfect market.

“Price caps for example will clearly reduce further the possibility of market entry and hinder market expansion. Removal of the point of sale advantage could result in a dramatic reduction in sales—given that, as the CC notes, it is the only effective way of selling PPI. This will not only presumably leave consumers unprotected but also may result in price increases of the underlying credit products.”

There is also concern, he says, that there may be rebalancing of tariffs to pay for any price reductions in PPI.

“Clearly, a detailed analysis of the extent to which PPI margins are cross-subsidising other product lines—possibly including personal banking—may be appropriate before price caps are introduced,” Taylor adds.

Whatever the outcome, he adds, the banking and credit product industry, already rocked by successive Office of Fair Trading investigations, will continue to endure a bumpy ride over PPI.