PPI covers repayments on credit products if the borrower cannot afford to maintain payments because of an accident, sickness, unemployment or death. In 2006, over 90% of PPI products sold in the UK were sold in connection with personal loans, credit cards, mortgages and second mortgages.
The report sets out the Commission's provisional findings following a 15-month investigation into PPI in the UK and concludes that lack of competition is having an adverse affect on consumers.
"Companies face little or no competition when selling payment protection insurance to their credit customers," said the Commission last week, "and as a result customers appear to be overcharged by over £1.4 billion a year".
The Commission estimates there are over 14 million PPI policies in the UK. But, according to consumer organisation Which?, as many as two million loan customers may have been sold PPI policies under which they will not be eligible to make a claim.
The problems identified by the report lie with the retail distribution of PPI to consumers, rather than in the wholesale provision of PPI products by underwriters to distributors.
One of the main features of the retail market is that the majority of PPI policies are bought at the same time as the related credit product. In the Commission's view, this gives the customer little chance to shop around.
"Most consumers understandably focus on the loan or credit and its APR and tend to make a snap decision when the PPI product is then offered to them," said Peter Davis, the Inquiry Chairman. "In fact, many customers simply aren't aware that they can get PPI elsewhere, potentially for less and equally others believe that buying PPI from the provider increases their chance of getting a loan".
The Commission also concluded that complicated policies and pricing structures hinder customers from being able to compare different PPI products effectively. It found that "switching" (changing to an alternative provider) can be expensive and, in the case of credit card PPI, lack of access to information about the consumer's outstanding balance can make it almost impossible for a "standalone" PPI provider to offer equivalent cover.
As a result, although the price of standalone PPI can be significantly less than the price of PPI bought at the point of sale, the standalone market remains limited in scope.
The Commission is proposing a wide range of possible remedies to address the competition concerns it has identified. These include a complete ban on "credit point of sale" PPI, which it believes would encourage customers to compare PPI products on a standalone basis in the market and choose their own cover.
A further proposal would prohibit the sale of single-premium policies, where the total premium is paid in a lump sum at the beginning of the contract and usually added to the loan.
Additional measures are aimed at improving the information given to customers in advertising and marketing material and at the point of sale, enabling them to compare products and make informed choices.
Information on PPI and credit products could also be made available to comparison websites, market research companies and publishers of best-buy tables.
Some of the proposals for improving customer awareness complement the Financial Services Authority's new rules aimed at improving PPI selling practices, which will come into effect in July this year (see: The PPI rules in ICOBS, an OUT-LAW Guide).
In addition, however, the Commission believes that making all PPI polices annually renewable would give consumers a further chance to compare products and switch provider if they can find a better deal.
In order for these remedies to start having an effect and give rise to lower premiums, the Commission is also proposing a temporary price cap on PPI premiums for a limited period.
Alan Davis, a competition law specialist at Pinsent Masons, said: "This is an unusual and highly interventionist remedy for the Commission to propose. The Commission has previously considered – but has always avoided – the imposition of price caps in its investigations of other financial services products, such as home credit and store cards."
Nick Starling, the ABI's Director of General Insurance at the Association of British Insurers, believes the proposals may kill rather than cure.
"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," he said. "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. It would be disastrous to leave many people unprotected to deal with unforeseen financial crisis".
The Competition Commission has invited views from interested parties on its provisional findings and the proposed remedies by 30th June 2008, including views on whether there are any alternative practical remedies. Its final report will be published at the end of the year.
