Consumers overcharged for PPI by £1.4 billion
Banks are overcharging borrowers taking out payment protection insurance (PPI) by over £1.4 billion each year, an investigation into these types of policies has found.
The Competition Commission (CC) has been investigating PPI for around a year, after the Office of Fair Trading complained about a lack of competition in the market. Around 80% of PPI policies are sold by high street banks, and there has been mounting concern that aggressive selling techniques have resulted in thousands of consumers being mis-sold policies.
The CC says the vast majority of the UK’s 14 million PPI policies were sold alongside a loan or other type of credit, with most people unaware that they are able to shop around to compare prices and deals.
This effectively gives a green light to banks, mortgage lenders and credit card providers to charge higher prices, according to the CC.
“We’ve found a serious problem with the PPI market and customers are paying for the lack of competition,” says Peter Davis, the deputy chairman of the CC who headed up the investigation. “Most consumers focus on the loan or credit and its APR and tend to make a snap decision when the PPI product is then offered to them rather than looking at the true cost of the credit and PPI together.”
Davis also warns many consumers may be under the false impression that buying PPI from the provider increases their chance of getting a loan.
As a result of the investigation, the sale of PPI products at the time of sale could be banned.
Another issue highlighted by the investigation is that the complexity of PPI products means it is hard for consumers to shop around and compare deals – for example, many providers will “bundle” the price of the PPI with the cost of the loan. As a result, credit providers do not face any stiff competition and consumers are getting a “raw deal”.
Evidence also suggests high prices for PPI policies are being used to subsidise interest rates on personal loans. And despite the fact that the majority of policies are taken out at the time of sale of credit, people who at a later date wish to switch PPI policies to an alternative or more appropriate type of cover are hindered from doing so, according to the investigation.
The CC says unsatisfactory terms make switching expensive especially for personal loans and secured loans. For example, people may find the switching terms will leave them uninsured for a period of time.
To help consumers get a better deal and end the current detrimental situation, the CC has proposed a number of measures:
- Stop firms from selling PPI at the point-of-sale of credit. There would also be a fixed time period after the sale when no insurance sales would be allowed.
- Single premium policies – which bundle the cost of insurance with the credit, and increase the interest rate – could be banned.
- Price caps on policies for a limited period of time to bring down costs across the marketplace to more “competitive levels”.
- Advertising and marketing material should make the cost of PPI clear to consumers and highlight that PPI is optional and they have a right to shop around.
- All products to be renewed annually to give people an opportunity to switch deals. Customers will also be sent statements reminding them of the cost of their policy and given the option to cancel.
- PPI providers will be forced to allow comparison services access to information about their products, in order to help people compare different policies.
Who is to blame?
The CC says the problem lies not with the companies that underwrite the
insurance policies but with the ‘distributors’ who sell policies when
they sell their credit products. This includes banks, mortgage lenders
and credit card providers, as well as financial advisers and mortgage
Although there are some standalone PPI providers, many of whom might
offered more competitive deals, the CC says they have struggled to “get
a foothold” because of the lack of people shopping around. In addition,
the report notes that a lack of access to consumers’ balance
information means standalone providers are unable to offer equivalent
PPI policies to consumers, making switching difficult.
But the Association of British Insurers (ABI) says the industry has already started to address problems in the PPI marketplace. It also warns that the measures proposed by the CC could have a negative impact on consumers.
Nick Starling, a direct of general insurance at the ABI, says: "We are very concerned that the CC's proposed remedies could destroy this market, particularly while we are facing a period of economic uncertainty. It would be disastrous to leave many people unprotected to deal with unforeseen financial crisis."
The British Bankers' Association agrees: "If some of the recommendations are adopted it could leave customers exposed just as economic conditions are worsening. The industry has moved on since the CC research has been carried out. Customers are better able to shop around and make comparisons, there is more choice around and customers are provided with a separate document showing the key facts of the policy before they take it out," says chief executive Angela Knight.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.