Sale of PPI with loans to be banned
The Competition Commission has recommended banning the sale of payment protection insurance alongside loans and credit as part of its high profile investigation into the sector.
The measure is just one proposed by the public body to increase competition in the PPI market, amid damning evidence that consumers are overcharged and even mis-sold this type of insurance when they buy it alongside loans, mortgages and other forms of credit.
As well as banning the sale of PPI within 14 days of a credit agreement being taken out, the Competition Commission also recommends prohibiting the sale of single-premium PPI policies, where the premium is rolled into the loan and accrues interest.
Lenders could also be forced to provide PPI quotes to customers, which clearly state the cost of the policy, and provide annual statements to customers as part of the Competition Commission’s proposals.
With the vast majority of the UK’s 13 million PPI policies sold at the same time as a consumer takes out a loan or other type of credit, the Competition Commission says people are not aware they can shop around and compare prices.
The proposals have met with a mixed reaction.
Andrew Hagger, spokesman for Moneynet.co.uk, says banning the sale of PPI alongside loans will encourage people to shop around.
“This will give consumers the opportunity to weigh up the costs and benefits of such cover without feeling pressured by front line staff with one eye on their monthly sales target,” he adds.
Research from Paymentcare.co.uk, an independent PPI provider, claims that encouraging people to shop around rather than buy PPI direct from their lender could save them over £2,700.
Shane Craig, spokesman for Paymentcare.co.uk, says: “Lenders’ ability to sell their own PPI at the same time as a loan has been one of the single most unfair financial practices of recent years and has cost consumers billions of pounds.”
The proposal to outlaw single premium PPI has been welcomed by consumer watchdog, Which?
Peter Vicary-Smith, chief executive of Which?, says: “Single premiums trap people into poor value products that are difficult to get out of, but by staggering the payments, consumers will have more control. This sounds the death knell for shoddy protection and is a wake up call to the industry to develop useful products that consumers actually need.”
But the Association of British Insurers (ABI) warns that restricting the sale of PPI could leave some consumers unprotected.
It points to the large increase in the number of people recently unemployed claiming on PPI as evidence that this type of product can protect people and their families against financial hardship.
Nick Starling, director of general insurance and health at the ABI, says that the measures could completely kill the PPI market - leaving millions of consumers with no protection at all.
“By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong,” he adds.
There are also concerns that the measures could make loans and other forms of credit more expensive as lenders claw back profit elsewhere.
Hagger explains: “The possible downside of these proposed reforms is that lenders may have been subsidising their lending rates with the vast profits generated by PPI sales. If the new measures eat into lenders massive PPI revenue streams, there is a real danger that it may be recouped from the customer in the form of higher interest rates on credit products.”
Competition Commission's proposals in full:
• A prohibition on the sale of PPI by a distributor to a customer within 14 days of the distributor selling credit to that customer. The distributor cannot re-contact the customer for 14 days after the sale of credit, but customers will be able to contact the lender and purchase a PPI policy 24 hours after the credit sale.
• Credit providers will be required to provide a ‘personal PPI quote’, which will clearly state the cost of the PPI policy individually and when added to the credit product.
• A prohibition on the selling of single-premium PPI policies.
• A requirement on all PPI providers to provide certain information and messages in PPI advertisements (including the price of their PPI, expressed in a common format of monthly cost per £100 of monthly benefit, and that PPI is optional and available from other providers).
• A requirement on distributors to advertise personal loan PPI second-charge mortgage PPI alongside their respective credit advertisements.
• A requirement on all PPI providers to provide certain information on PPI policies to the FSA and a recommendation to the FSA that it uses this information for its PPI price comparison tables.
• A requirement on all PPI providers to provide an annual statement for PPI customers, including information similar to that provided in the personal quote, to encourage customers to review their policy annually and make it easier for customers to decide whether to switch.
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.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
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.