The selling of payment protection insurance with personal loans has led to excessive premiums and the exploitation of customers by banks and building societies.
This is the conclusion of a new report published by the Economic and Social Research Council (ESRC) Centre for Competition Policy, based on research by the University of East Anglia and Newcastle University. The study, which used data from Moneyfacts, found that over the period January 1998 to December 2007, lenders cross-subsidised the cost of personal loans by offering over-priced payment protection insurance.
Banks were the worst offenders, typically charging significantly more than mutually owned building societies.
During the ten years covered, the average minimum and maximum monthly cost of PPI stood at £8.27 and £49.58 respectively, indicating that some firms profited far more than others from supplying PPI jointly with personal loans.
Report author Dr John Ashton says: “Clearly some firms were and are exploiting customers far more than others. The deregulation of financial services and subsequent joint provision of insurance and banking services has had adverse results for consumers. Concerns have been raised about uncompetitive pricing and the possibility of policies being misleading. It is surprising to see such a high level of variability in the costs of payment protection insurance. Consumers can feel pressurised into taking out PPI and often don't realise that they can shop around, compare products and go with another PPI provider. Assessing if firms act in a way that exploits these customer limitations and challenging these circumstances when they happen should be a regulatory priority."
Regulatory changes are underway, with the sale of single premium PPI alongside a loan banned in May 2009. Further restrictions are due to come into force next year, although Barclays is leading the appeal by a handful of banks against the new measures. The case is currently being heard by the Competition Appeal Tribunal.
On average the monthly costs of a £5000 personal loan with PPI was £186.75 compared to £162.37 without. These costs also changed over time, with the monthly cost of a £5000 personal loan without PPI being £173.14 in 1998, falling to £158.32 in 2007. The costs of PPI have been less flexible, with the average monthly PPI cost being £25.73 in 1998 and £24.97 in 2007.