News

The Competition Commission report is the result of a "super complaint" made by Citizens' Advice to the Office of Fair Trading (OFT). In 2005, Citizens' Advice urged the watchdog to launch an investigation into the PPI business, after widespread complaints of mis-selling. At the time there were an estimated 20 million policies in force, producing an annual revenue in excess of £5 billion for the banks and insurance companies.

In October 2006 the OFT found the PPI market to be failing consumers, and referred the complaint in to the Competition Commission, It was this body which announced its findings last week.

At the same time, a separate report by the consumer watchdog Which? has estimated that a third of the policies taken out in the past five years have been mis-sold. An astonishing two million people have paid out for insurance that is useless. They would never be able to claim on their policies because they are ineligible for the cover they have been persuaded to buy.

For example, policies have been sold to the self-employed or those on fixed-term contracts, while the insurance typically covers only those who lose their job with an employer.

Another bad practice that was rife at the time Citizens' Advice made its original complaint was that payment for cover could be made up-front, in a single premium that was added to the loan - thus increasing the amount of interest due. Worse still, if the loan was paid off early it was impossible to cancel the insurance - which was now not needed - because it had already been paid for in advance.

Even the insurance industry's own trade body, the British Insurance Brokers' Association, branded single-premium PPI policies "bad value", and in 2006 called for such policies to be outlawed.

How 'cheap' is your cheap loan?

Loan companies have long used PPI sales as a ruse to keep loan interest rates attractively low. Headline rates could be made to look beguiling because the real cost of the loan was hidden in charges for overpriced and often unsuitable PPI.

One of the most scurrilous practices that has come to light has been loan firms telling borrowers that the insurance is compulsory - meaning borrowers have been denied credit unless they have been prepared to shell out many thousands of pounds for insurance that they didn't need or want, or which was useless because they would have been unable to claim on the policy anyway.

In the worst instances, insurance could add more than 30% to the cost of an unsecured loan. At the time that Citizens' Advice made its complaint to the OFT someone who borrowed £10,000 over five years from NatWest would have paid £3,267 in insurance - nearly a third of the loan.

If they had taken the same loan out with Abbey they would have paid £2,766 while if they had borrowed from Alliance & Leicester they would have paid £2,376 for their insurance. However, if they had bought the insurance from an independent insurer, such as British Insurance, they would have paid just £468 for the same cover!

The City watchdog, the Financial Services Authority, announced its own findings about the PPI market in October 2006, and found that, despite its sabre-rattling, many firms were still failing to treat their customers fairly. Nevertheless, 11 companies had been forced to stop selling PPI, either permanently or temporarily, while they sorted out their sales processes; three firms had had their FSA authorisation to sell PPI cancelled; and four large firms had been forced to review past PPI sales to ensure they were appropriate.

Additionally, several lenders were hit in the pocket when they were fined for poor PPI sales practices. In February 2007 credit card company Capital One paid the FSA a penalty of £175,000 in connection with PPI sales.

The Competition Commission said in its provisional report on PPI sales that the vast majority of PPI policies were taken out at the same time as a loan or other type of credit. It found that many consumers were totally unaware that they could buy PPI from other providers, and that they rarely shopped around to compare prices and policies.

The Commission said that the way PPI was marketed made it difficult for other providers to reach customers, and the absence of competition meant that the banks and other lenders were able to charge higher prices. Its suggested solution was a ban on the sale of loans and payment insurance at the same time.

'Serious problems' with PPI market

Peter Davis, the Competition Commission deputy chairman and chairman of the inquiry, said, "We've found serious problems with the PPI market and customers are paying for the lack of competition. 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."

Campaigners against PPI mis-selling have been encouraged by the report. Teresa Perchard, Citizens' Advice Director of Policy, says, "While borrowers are trying to be responsible and seeking peace of mind by taking out PPI policies, many people are pushed into debt by the extra PPI costs."

Will loan rates rise?

However, consumers need to be aware that when looking at the issue of loan protection, it is important not to throw the baby out with the bathwater. A clampdown on PPI sales could see loan rates soaring.

Since overpriced PPI sales were helping to depress the headline rates of loans to make them seem more attractive, any ban on the sale of PPI at the time of taking out a loan is bound to see the cost of the loan heading north, as lenders try to hang on to their profits.

Secondly, people should not be scared off buying insurance cover that they need. They simply need to take care over what they are buying and not be lured into a bad deal by their lender. The last thing people should be doing at a time of economic stringency is ditching insurance cover that they might need to protect their families should they be unable to work.

Nick Starling, Director of General Insurance and Health at the Association of British Insurers, says, "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."

Matt Morris, Policy Adviser at broker LifeSearch, agrees. He urges people to review their whole financial situation before opting for PPI, as income protection might be more appropriate, "The real problem is that people have these [PPI] policies pushed on them when taking out loans, without any real idea of the alternatives out there.

"A product such as income protection offers better value for money, pays out for longer and is often cheaper, too. If consumers knew the full details, very few would opt for PPI."

If you need loan insurance, Which? offers the following tips:

• Don't be persuaded to buy PPI, but do think about how you would pay your mortgage and other bills if you are sick and can't work.
• If you need help deciding on the best type of protection insurance, talk to an independent financial adviser - one that can search the whole market for the policy that best suits your needs and budget.
• Advisers offer two levels of service: information only and advice. Always take the advice route for protection insurance, as this gives you the right to make a complaint if you are sold the wrong policy.
• If you decide to take protection, consider income protection first. This type of policy provides cover for long-term sickness by providing an income up to retirement if necessary.