The financial watchdog has told firms to stop selling controversial single premium payment protection insurance (PPI) alongside loans by the end of May.
The move comes just one month after the Competition Commission published its long-awaited investigation into PPI with the recommendation that banks be banned from selling single premium policies.
Single premium PPI is controversial because the cost of the insurance is rolled-up to the loan amount; while this allows people to defer the cost of protection, it also means they ultimately pay for as the PPI premium attracts the same rate of interest as the debt.
The Financial Services Authority (FSA) has now written to all firms still selling single premium PPI with unsecured personal loans requesting they withdraw the product as soon as possible, and by no later than 29 May.
Six of Britain’s biggest banks – including Alliance & Leicester, Barclays, The Co-Operative Bank, Lloyds, HBOS, and RBS/NatWest – have already stopped selling this type of PPI alongside loans.
There have been concerns that restricting the sale of PPI could put borrowers at risk, especially considering the financial climate. But in his letter to PPI providers, Jon Pain, managing director of retail markets at the FSA, argues that a ban is still needed.
“We recognise the severity of the current economic climate and the financial problems many consumers are facing,” writes Pain. “Moreover, we believe that PPI can play an important and legitimate role to cover repayments on specific credit agreements for consumers facing job loss, or other issues at this difficult time.
“However, our focus remains on how this product has been, and continues to be, sold and whether consumers have been treated fairly during the sales process.”
In its report, the Competition Commission also concluded that banks and other providers be banned from selling all types of PPI cover alongside credit. Its investigation found that banks overcharge PPI customers by more than £1.4 billion each year, with many people unaware they are entitled to shop around for cover.
The FSA’s request for providers to stop selling single premium PPI is likely to provoke a mixed response. While consumer groups have long campaigned for this type of insurance to be outlawed, insurers and trade bodies have expressed concern that consumers could be left under-protected.
However, Eric Galbraith, chief executive of the British Insurance Brokers' Association, has given his support to the FSA.
"Single premium loan protection sold by lenders has proven to be bad value in many cases, so this news is excellent for the customer," he explains. “PPI, however, is a useful product. Consumers need to assess if it is suitable for their individual requirements and be aware that wider cover is available - often cheaper - from providers other than their lender.”