Crackdown for loan insurance

Thursday 13th November 2008

The Competition Commission (CC) today issued plans outlawing the sale of payment protection insurance (PPI) within 14 days of a loan.

The body's interim report into PPI – which is often sold alongside loans – follows a series of cases of mis-selling of the insurance to people who would not have been able to claim, due to their medical or employment circumstances.

The CC found lenders "face little or no competition when selling PPI to their credit customers".

Lenders have previously been criticised for leading borrowers to believe PPI was necessary when taking out a loan and including the premium in the loan – pushing up the cost to the consumer.

The vast majority of the UK's 13 million PPI policies are sold at the same time as a consumer takes out a loan or other type of credit, the CC found, and many consumers are unaware that they can buy PPI from other providers.

The CC found: "Consumers rarely shop around to compare prices and terms and conditions of PPI policies and rarely switch PPI providers.

"This ‘point-of-sale’ advantage makes it difficult for other PPI providers to reach credit providers’ customers and in the absence of such competitive pressure, PPI distributors are able to charge high prices."

Peter Vicary-Smith, chief executive of consumer watchdog Which? said the report was a "huge victory for consumers".

"Consumers have often felt pressured into buying expensive and inadequate PPI products. The Competition Commission has listened to the consumer voice and has taken decisive action.

“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."

He added: "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.”

However, Nick Starling, director of general insurance at the Association of British Insurers, the report was "devastating news for consumers".

"By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong," he said.

"Unemployment claims on PPI policies have grown by 69 per cent in the last twelve months, showing just how valuable this cover is proving to be."

He called on the CC to rethink its proposals before publishing its final report in January.

"If the commission continues down this path it will kill the PPI market altogether, leaving millions of consumers with no protection at all," Mr Starling concluded.

While the changes have been welcomed by consumer groups and independent PPI providers, lenders have come out strongly against the move – claiming the CC is throwing the baby out with the bath water and depriving consumers of PPI protection.

A spokesperson for the British Bankers' Association (BBA) said: "This is very bad news for customers. Coming on the heels of news of approaching two million unemployed it is totally without conscience to encourage people to borrow without back up."

He added the CC the evidence showed a 14 day delay would mean no one would take PPI cover, as there is only demand for it when a loan is taken.

"The Competition Commission is simply wrong to suggest people should be prevented from taking advantage of products designed specifically to cushion the effects of accident, sickness and unemployment at the very time they are considering taking out a loan," he added.

"This is an irresponsible decision exposing vulnerable customers to economic difficulty when they may need help most."

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