PPI covers borrowers against repayments due on credit products and loans if the borrower cannot afford to pay because of an accident, sickness or death.
Many PPI products are paid for by a regular premium, but most PPI sold in connection with unsecured personal loans is paid for by a single premium added to the loan. Interest is then charged on the premium and the loan together.
In its recent investigation into the UK PPI market, the Competition Commission found that the cost of most personal loan PPI over the term actually exceeded the interest payable on the loan. Customers also face a number of barriers if they want to switch PPI provider, not least a lack of available information about alternative products.
Last month, as part of a package of remedies to increase competition in the UK PPI market, the Commission announced it would be prohibiting the sale of all single-premium PPI. The ban is likely to come into effect in October 2010.
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 – pre-empted the ban by announcing that they would stop selling single-premium PPI with personal loans by the end of January 2009.
Jon Pain, the FSA’s managing director of retail markets has now written to the chief executives of all firms still selling and underwriting single-premium PPI with personal loans asking them to withdraw the product as soon as possible.
The letter states:
“We recognise the severity of the current economic climate and the financial problems many consumers are facing. Moreover, we believe that PPI can play an important and legitimate role to cover repayments on specific credit agreements for consumers facing job loss, or other issues at this difficult time. However, our focus remains on how this product has been, and continues to be, sold and whether consumers have been treated fairly during the sales process.
“We therefore request that, if your firm has not already done so, it stops selling single-premium PPI with unsecured personal loans as soon as possible and in any event by 29th May 2009. In view of our ongoing concerns across the single-premium market over the standard of sales, we believe this request is justified to bring an orderly withdrawal of single-premium PPI from the market.”
The FSA has asked for any comments on the letter to be submitted by 31st March.