Payment Protection Insurance has always been an easy-sell, highly profitable product for UK credit providers such as retail banks. Too easy, believes the UK’s Competition Commission, which has proposed radical reforms that could open up the PPI market to currently marginalised, alternative product providers.
All of the UK’s leading retail banks could lose valuable income if steps to open up the country’s Payment Protection Insurance (PPI) market are pushed through. The UK’s Competition Commission (CC) has just published its initial conclusions from an investigation into the PPI market – the CC’s focus was to examine whether there is effective competition in the PPI market but its provisional findings are a damning appraisal of companies selling PPI to mortgage, loan and credit card customers.
“We’ve found serious problems with the PPI market and customers are paying for the lack of competition,” stated the CC’s deputy chairman, Peter Davis. “The way PPI is sold as an add-on to a loan or other credit product means distributors escape the pressure they should face from competing suppliers.”
Distributors don’t appear to compete much with each other on either price or quality of PPI neither do they appear to do much direct advertising of PPI to win customers from each other.”
PPI enables borrowers to maintain credit repayments should they become unable to pay off loans due to accident, sickness, unemployment and, under some policies, death. Over 90 percent of PPI sold in the UK in 2006 was either related to personal loans, credit cards or mortgages.
The CC stated: “As a result of a lack of competition, it is highly profitable to distribute PPI – we estimate that the 12 largest distributors of PPI made profits in excess of the cost of capital of £1.4 billion in 2006, on their combined Gross Written Premium (GWP) of £3.5 billion, representing a return on equity of 490 percent.”
The UK’s PPI market has been firmly in the consumer spotlight since a complaint was lodged at the Office of Fair Trading (OFT) by consumer activist organisation The Citizens Advice Bureau in 2005. The OFT’s study led to it referring the PPI market to the Competition Commission (CC) for further investigation in February 2007.
The industry has seen hefty fines already handed down by regulatory body the Financial Services Authority for inappropriate sales methods. Notable examples were a £610,000 ($1.2 million) fine paid by a unit of US conglomerate General Electric, GE Capital Bank, in 2007, and a £1.09 million fine levied against a unit of HSBC in early 2008.
Firmly in the consumer spotlight
In its report published in June, the CC found that many UK customers were not aware that they can get PPI elsewhere, potentially for less; others believed that buying PPI from the provider increases their chance of getting a loan. The CC also noted that consumers who want to switch PPI policies to alternative providers or to alternative types of insurance are hindered in doing so by, for example, terms which make switching expensive, particularly in the case of single-premium policies.
In its preliminary report, the CC proposed ways of reforming the market, including:
• Standard disclosure on advertising and marketing material of the cost of taking PPI along with a requirement to 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;
• Standardise disclosure of price and other information to allow comparison of products across the market and compel credit product providers to provide firm quotes on PPI in writing;
• Compel credit product providers to provide information about PPI and credit products to providers of comparative information for publication; and
• Prohibit the selling of PPI at the credit point of sale.
Proposals to address barriers to switching between PPI providers were also set out by the CC. These included prohibiting single premium policies, and imposing obligations to share information about a customer’s credit card balance with an underwriter nominated by the customer.
A mixed reception
The CC’s proposals have received a mixed reception. But strong reservations were expressed, for instance, by the Association of British Insurers (ABI).
“We acknowledge that there have been problems in the PPI market and we have done a lot to change that. These changes now need time to bed in,” said the ABI’s director of general insurance and health, Nick Starling.
However, he stressed: “We are very concerned that the Competition Commission’s proposed remedies could destroy this market, particularly while we are facing a period of economic uncertainty.” The market is changing and should not be judged retrospectively, he concluded.