Banks in PPI ban
Banks are likely to be forbidden from selling payment protection insurance (PPI) alongside loans and credit cards, with policies where the premium is added to the loan amount expected to be banned altogether.
The Competition Commission has concluded its investigation into the sale of PPI with the recommendation that single-premium policies (where the premium is rolled into the loan amount, thereby attracting interest) be banned altogether. It is also stopping credit providers from selling PPI until seven days after the sale of the loan, credit card or mortgage.
The measures aim to improve competition in the PPI market amid evidence that consumers are paying too much for this type of credit protection and often take out policies without fully understanding whether they need it or not.
The Competition Commission says many people don’t realise they can shop around for PPI, with the vast majority of the UK’s 12 million policies sold at the same time as a consumer takes out credit.
Peter Davis, chairman of the Competition Commission’s inquiry into PPI, says: “These are significant measures carefully designed to address the serious competition problems that currently exist in this market. The ‘point-of-sale’ advantage has meant that leading providers have faced little competition for PPI and, as a result, have charged persistently high prices.”
Other measures include ensuring consumers are provided with binding personal quotes and clear information about the cost of PPI. It will also be easier for consumers to switch their PPI policy at a later point if a better deal becomes available.
Banks seem to have pre-empted the conclusion of the Commission. Earlier this month, six high street giants - including Barclays, Lloyds TSB and Halifax - decided to stop selling PPI alongside loans and other types of credit. The Financial Services Authority last year urged banks to stop selling single-premium PPI policies.
Consumer groups have welcomed the recommendations. Louise Hanson, head of campaigns at Which?, says: “This decision helps sound the death knell for PPI. For too long too many consumers have suffered from shoddy, expensive and inadequate protection.”
But Nick Starling, director of general insurance at the Association of British Insurers (ABI), says the measures could leave vulnerable borrowers unprotected during the economic downturn.
The ABI recently released figures that showed there were 19,105 new unemployment claims on PPI policies in November 2008, up 118% from the same month in 2007.
Starling adds: “This massive leap in claims shows that PPI is helping many people through a difficult financial period. […] We remain extremely concerned that the fundamental risks to borrowers have not been addressed.”
But the Competition Commission argues that cleaning up the PPI sector will improve its reputation among consumers.
“Consumers’ interests are not best served when the only choice the vast majority have is whether or not to purchase their credit provider’s PPI product,” explains Davis. “The resulting lack of competition means that the only offer consumers get is simply worse value than they are entitled to expect.
"Allowing the current shortcomings to continue unchecked would be damaging not just to consumers but also ultimately to the PPI industry itself."
And Hanson, from Which?, urges banks to take the initiative to protect consumers: “[…] It’s now time for the industry to develop useful products that consumers actually need to protect their finances.”
Lenders stand accused of making huge profits on the back of PPI and the lack of competition in the sector. But with this income stream likely to dry up as a result of the Competition Commission’s investigation, there are concerns that banks will recoup their losses elsewhere.
Andrew Hagger, spokesman for Moneynet.co.uk, says the banning of single premium PPI is a “bitter blow” for high street lenders.
“The concern is that some of the profit lost from PPI sales may be reclaimed in the form of higher interest rates being charged on personal lending products,” he adds. “Time will tell, but this is an area we will be watching closely during 2009.”
Other commentators call for more work into PPI to help protect existing customers. Louise Bond, personal finance manager at uSwitch.com, says more must be done by banks to ensure that people claiming on PPI actually receive their money.
Although the ABI says unemployment claims are up, it was unable to confirm the percentage of these that were successful, how big average pay-outs currently are and how long most insurers pay out for.
“More needs to be done to address the negative ratio between the number of policy holders and the number of successful claimants,” says Bond. “This could be attributed to people being sold unsuitable products in the past, whereby they would stand no chance of a claim being upheld.”
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.