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.
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“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.”
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By GlobalDataThe 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.
