Out-Law News 6 min. read

Radical shake-up of payment protection insurance promised for 2010


Payment protection insurance paid for by a single premium will be banned from 2010 under tough new measures to increase competition in the UK PPI market, the Competition Commission has announced.

Banks, building societies, mortgage and credit card companies will also be prohibited from selling PPI to their loan or credit customers for seven days after the credit sale, giving the customer time to shop around for a better deal.

PPI covers repayments due on credit products if the borrower cannot afford to pay because of an accident, sickness, unemployment or death. In 2007, nearly 95% of all PPI policies issued were sold at the same time as a personal loan, credit card, mortgage or second mortgage.

The Competition Commission's final report, published on 29th January, follows a two-year investigation into the UK PPI market. The Commission concludes that credit providers and intermediaries face little or no competition when selling PPI products to their credit customers, with the result that many customers are being overcharged.

Most PPI products are sold at the same time as a loan or credit, giving the credit provider a considerable "point of sale" advantage over other providers. The Commission found that a significant number of people believe that taking out PPI will improve their chances of obtaining credit, or even that it is a condition of the loan.

Announcing the publication of the final report, Competition Commission deputy chairman Peter Davis described this point of sale advantage as the "single biggest barrier to competition in this market".

The point of sale ban

The Commission's remedy is to introduce a seven-day point of sale ban that will separate the credit transaction from the PPI sale.

The credit provider or intermediary can talk about PPI “in general terms” during the credit sale and will need to take some personal details if he is providing a personal PPI quote, but he cannot sell the customer a PPI policy during the seven days. Nor must he “pre-sell” the PPI, for instance by getting all the paperwork ready to submit at the end of the prohibition period.

Time will run from the conclusion of the credit sale or from when the customer is provided with a personal PPI quote, whichever is the later.

The customer, however, can buy PPI during the prohibition period if he contacts the credit provider or intermediary by telephone or via the internet more than 24 hours after the credit transaction. Face-to-face contact or contact by post does not count. And the provider must make sure the customer has seen a personal PPI quote before any sale is made.

Single-premium PPI

The Commission believes PPI policies paid for by a single premium prevent customers switching to another provider.

They are also expensive. Most personal loan PPI is single-premium, with the cost of the premium added to the loan. Interest is then payable on the whole amount. The Commission's investigations found that the cost of most personal loan PPI over the term exceeded the interest payable on the loan.

The ban on single-premium policies is expected to come into effect in October 2010. After that, the only charge that can be levied on a PPI policy will be a regular premium paid monthly or annually by the customer.

Some credit providers anticipated the Competition Commission's decision. On 20th January, five banks – Alliance & Leicester, Barclays, the Co Operative Bank, Lloyds Banking Group (including Lloyds TSB, Halifax and Bank of Scotland) and RBS/Nat West – announced they were to stop selling single-premium PPI with personal loans by the end of January 2009.

Information

The Commission's report identifies a lack of information about PPI products as another barrier to competition.

Policy terms, complicated in themselves, vary from one provider to another, making it difficult for customers to compare like with like. Many firms only provide accurate price illustrations if the customer goes through a full credit application. And price comparison websites, although useful, can be limited in what they compare.

The Commission's answer is a package of remedies to enable customers to make an informed choice. A personal PPI quote setting out the cost of the product to the customer will be a pre-condition of selling PPI. Customers will also be sent annual statements to encourage them to review their cover and decide whether or not to switch providers.

New rules governing PPI advertising and marketing will make sure the material is easy to understand and that any price information is given in a standard format.

In addition, all PPI providers will be required to provide information to the Financial Services Authority for inclusion in the FSA's PPI price comparison tables and to the OFT on compliance. Large PPI suppliers will also have to commission an annual mystery shopping exercise and report the results to the OFT.

Impact

There can be little doubt that the Commission's remedies will radically change the PPI market in the UK.

The downside for many credit providers is likely to be increased costs and the possibility of reduced sales if customers lose interest in their PPI products during the prohibition period.

Advertising costs for PPI, for instance, have remained relatively low given the size of the market. But under the new regime credit providers will need to compete with each other and with providers of standalone PPI products to attract (and keep) customers during the prohibition period and later on, when annual reports prompt customers to review their cover.

Distribution costs are also likely to rise as credit providers change their selling procedures and related IT systems.

The Commission acknowledges all these drawbacks in its report but believes they are a price worth paying for a competitive PPI market.

Competition Commission deputy chairman Peter Davis said:

"In the current economic climate there may well be a greater need for consumers to obtain the cover that PPI – and other protection products – can provide. The increased economic uncertainty makes it even more important that consumers have choices, that they have the opportunity to make the right choice and they can get value for money.

"We recognise that prohibiting firms from completing PPI sales during this time interval and prohibiting single-premium policies are significant interventions in this market. However, these actions are necessary to enable consumers to benefit from lower prices and better choice".

Alan Davis, competition specialist at Pinsent Masons LLP, thought the seven-day prohibition period could cause confusion for consumers and sellers.

"Whether this untested remedy is going to be effective in addressing the Competition Commission's concerns remains to be seen" he said.

"It might have been preferable to choose a tried and tested way of giving consumers time to think and shop around away from the credit sale environment, such as a cooling-off period".

Nick Starling, director of general insurance and health at the Association of British Insurers (ABI) warned that the point of sale ban could leave more consumers unprotected.

"Figures released only [on 28th January] by the ABI show that in November 2008 there were 19,105 new unemployment claims on PPI policies. That is an increase of 118% from 8,772 in November the previous year. This massive leap in claims shows that PPI is helping many people through a difficult financial period," he said.

"We welcome the reduction from 14 to seven days for the point of sale ban which shows that the Competition Commission has acknowledged our fears about the risks to borrowers,” he added.

"However, we remain extremely concerned that the fundamental risks to borrowers have not been addressed. Our job now is to work with our members and the regulators to minimise these risks and make it work. The devil will be in the detail," said Starling.

Some of that detail will be provided in the Competition Commission's order, which it plans to publish for public consultation on its website in June or July.

In the meantime, the Commission is carrying out consumer testing of the proposed personal quotation and annual statement documents and expects the results to be available during April.

If the order can be finalised before November 2009, the Commission hopes that its new rules on PPI advertising and provision of information will apply from 6th April 2010 and that the point of sale prohibition, the ban on single-premium policies and all other elements of the package will come into force on 1st October 2010.

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