On 7 February 2007, the Office of Fair Trading (OFT) announced that it has referred the UK payment protection insurance (PPI) market to the Competition Commission for further investigation.

This decision follows a period of consultation on the OFT’s October 2006 PPI report, after a super-complaint was made by Citizens Advice in late 2005. The Competition Commission will have up to two years to carry out a thorough market investigation and this may result in widespread changes to the structure of the market.

The OFT has not reasserted the claim made in the October report that the lack of competition in the PPI market causes an annual £1 billion of consumer detriment. It does, however, note that the market is worth about £5.5 billion and that consumer detriment is a significant fraction of this. Needless to say, it felt that the cost to the Competition Commission and business of an investigation was more than justified.

Key concerns raised by the OFT

The general structure of the market harms consumers

  • PPI is a secondary product bought only when purchasing a form of credit (mortgage, loan, credit card etc).
  • The main issue is that lenders - particularly the high street banks and building societies - have a “point of sale” advantage over other PPI distributors.
  • The complex nature of PPI and lack of product information (eg prices, exclusions) creates information asymmetry and limits choice - consumers do not shop around.
  • Few consumers cancel (14 per cent) - often deterred by inadequate refunds on single premium policies - and few of those (16 per cent) switch to another policy.
  • Market entry is rare and stand-alone distributors have low market penetration.
  • Much of the PPI market is vertically integrated - with underwriting and distribution of PPI within the same group.
  • Claims ratios (claims paid as a proportion of gross premiums) average about 20 per cent compared to up to 82 per cent for other insurance products - indicating high margins which are not competed away.

The conduct of firms adversely affects competition

  • The OFT indicates that lenders compete on the sale of credit products but see the mutual advantage in selling add-on PPI without competing.
  • OFT research indicates that PPI is often automatically included in the credit quote without the consumer’s knowledge. Under FSA rules, the price of PPI must be given separately from the price of credit.
  • Some consumers are misled into thinking that taking PPI would help with their credit application.
  • Headline APRs are used to draw in consumers and sell PPI (even though once PPI is factored in, the APR ceases to be a reliable indicator of price).

Scope of investigation

Given the recent investigation into store cards PPI (with remedies taking effect in May 2007), the OFT decided it was not necessary to include store card PPI within scope. However, the investigation will cover the supply of all other PPI services to non-business customers in the UK.


The OFT recognised that both industry and the FSA were taking action to address many of the concerns raised but concluded that more was needed. Given the scale of consumer detriment in particular, the reference was considered the proper and proportionate response.

Many months of rigorous evidence-based investigation will now follow. This will affect industry players at all levels of the PPI supply chain. The outcome may be the imposition of wide-ranging remedies to foster competition. These may include greater transparency for consumers, stricter policing of sales techniques and even possibly the separation of PPI and credit sales - to unpick the point of sale advantage