Lenders face little or no competition when selling Payment Protection Insurance (PPI) to their credit customers and as a result customers appear to be overcharged by over £1.4 billion a year, the Competition Commission (CC) has said in its provisional findings report into the sale of PPI in the UK.
PPI is insurance for loan repayments if someone loses their income due to ill health or unemployment.
It all sounds good, but the CC’s ability to make any changes is in reality very limited.
The report finds that the vast majority of the UK's more than 14 million PPI policies are sold at the same time as a consumer takes out a loan or other type of credit. Many consumers are unaware that they can buy PPI from other providers and rarely shop around to compare prices and policies. 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 - are able to charge higher prices.
The CC has made a number of threats to lenders:
Lenders may be banned from selling PPI policies to customers when they take out loans.
There may be temporary price limits on the policies, until competition brings their prices down
The prohibition of single premium policies
Whether the CC has the ability to do any of these is doubtful. It is unlikely that the government would let them as it needs banks’ help in the current economic crisis.
The CC has made a number of suggestions on how to increase competition in the PPI market:
Lenders to provide better information to customers about what they are buying and the price of the PPI relative to the price of loans
Offer an ability to compare products
Make it easier for customers to switch between providers
On the above, as most lenders are authorised in such a way that they can only offer products from one insurer, it is difficult to see how they could provide comparative details or offer alternatives.
The CC has not found problems with insurers or specialists who offer PPI as a standalone product. The CC actually endorses the principle of the product.
The CC suggestions:
Measures to increase customer search and address the failure of distributors to compete on price:
- Standard disclosure on advertising and marketing material of the cost to the customer of taking PPI along with a requirement to provide a statement of ‘key messages', which alert customers to the existence of other PPI products, sources of comparative information and that PPI is optional and does not increase the likelihood of obtaining credit.
- Further standardisation of PPI information given to the customer at the point of sale, using a standard format for the disclosure of price and other information to allow easier comparison of products across the market and also require firms to prove ‘firm quotes' on PPI in writing.
- Obligation to provide information about PPI and credit products to third party providers of comparative information for publication.
Measures to address the point-of-sale advantage:
- Prohibition on selling PPI at the credit point of sale and within a fixed time period of the credit sale.
Measures to address barriers to switching:
- A requirement for all policies to be renewed annually.
- A requirement to provide an annual statement of the cost of PPI and a reminder of the customer's right to cancel and early settlement terms.
- Remedies to address problems with single premium policies; either prohibiting these, or ensuring a choice of regular premiums alongside single premiums and/or requiring that single-premium products meet minimum terms for early settlement rebates and additional charges.
- Minimum standards for elements of PPI policies that act as a barrier to switching (initial exclusion periods and pre-existing conditions qualification periods).
- Obligation to share information about customer claims, which could enable the possible introduction of ‘no claims' discounts.
- Obligation to share information about the customer's credit card balance with an underwriter nominated by the customer.
Measures directly to address consumer detriment associated with high PPI prices:
- Imposition of price caps for a limited period in parallel with some of the remedies outlined above to enable prices to be brought closer to competitive levels more rapidly while the other proposed measures take effect.
Full responses to the report are too tedious to list here but the key points:
Insurer trade association ABI
The proposals could destroy the market. Leave well alone.
Bank trade association BBA
If some of the recommendations are adopted it could leave customers exposed just as economic conditions are worsening.
Citizens Advice Bureau
PPI from lenders is over expensive and often unsuitable. Lenders are ripping off, rather than looking after their customers. Lenders and their insurers should address issues of cost and quality as a matter of urgency.
Lenders trade body FLA
Nothing should be done that impairs PPI's variety, uptake or availability. Some of the remedy options proposed could mean consumers will miss out on valuable protection.
Financial Services Consumer Panel
Lender PPI, both products and sales, has been a source of inexcusable scandals for too long.
Lifesearch, financial advisors
Consumers need be given more information on the product they are buying. The real problem is that people have these policies pushed on them when taking out loans without any real idea of the alternatives out there. Banks and mortgage lenders make a fortune out of selling PPI. It is certainly quick and easy to sell but it offers consumers a relatively poor level of cover compared to other policies on the market. PPI is laced with exclusions and usually only runs for 1-2 years. Alternatively a product such as income protection offers better value for money, pays out for longer and is often cheaper too. If consumers knew the full details, very few would opt for PPI.
For years lenders have relied on pushy selling tactics of overpriced PPI cover.
Post Office Financial Services
It is clear that many customers still have little understanding of PPI and some do not even realise they have this insurance in force. Others, who have been at the hands of aggressive sales tactics, often feel they have no choice but to take the expensive policy tied to a loan or credit card if they want their application to be accepted - especially as credit becomes harder to come by. The Post Office has long been calling for an open market for PPI sales, where providers are honest with customers that other, cheaper, standalone products are available. There should be a clearer distinction between the cost of the loan/credit and the PPI product.
Income protection insurance: News update: June 2008