The Competition Commission published its final report on Payment Protection Insurance (PPI) on 29 January. The report makes hard-hitting recommendations, specifically restricting the sale of regular payment PPI and banning the sale of single premium PPI.
No more point-of-sale or single premium PPI
The Commission found a distinct “point of sale” advantage for sales of PPI with loans and credit. This means consumers often do not know they can buy PPI elsewhere, tend not to read the terms and conditions and rarely switch providers. Because of this lack of competition, prices for PPI are high. The Commission wants to introduce a package of reforms. The most significant of these are:
- a ban on the sale of single premium PPI. Premiums may still be payable yearly or monthly, but if a customer cancels an annual payment policy they must receive a proportional refund. Further, providers cannot charge customers for setting up or terminating a PPI policy;
- a ban on the sale of PPI at the same time as the sale of a credit product or in the following seven days. However, PPI may be sold 24 hours after point of sale to a customer who takes the initiative and contacts the credit provider or intermediary.
The ban on the sale of single premium PPI policies reflects the Commission’s findings that the terms of the policies made it difficult and expensive to switch to other policies. These terms create a barrier to competition in the PPI market. The Commission also felt the complexity of the products and the variety of pricing structures among single premium policies made it difficult for consumers to search for alternative or competing policies.
The ban on the active sale of PPI within seven days of point of sale is designed to encourage consumers to shop around for PPI, which would increase competition and reduce premiums. However, the Commission did make a concession to the industry here, as it had proposed a 14- day ban in its interim report in November 2008.
More clarity for consumers
The complex pricing of some PPI products also led the Commission to propose some information remedies:
- distributors and intermediaries must give customers binding quotes and information in marketing materials, including clear information on costs and a statement that PPI is optional;
- providers must offer PPI on its own as an alternative to a PPI bundled with another product;
- providers must send annual statements to customers. This will remind customers they can switch provider; and
- providers must provide information for inclusion in FSA’s price comparison websites.
The report prescribes information and provides guidance on each of these remedies.
How will the proposals be implemented?
The Commission intends to make an Order under section 161 of the Enterprise Act 2002. If it does so by November 2009, the remedies about advertising and provision of information will apply from 6 April 2010, and all other remedies will apply from 1 October 2010.
A response to consumer pressure
The report’s proposals come in response to consumer pressure groups like Which? that have long argued that single payment PPI offers no benefit to the consumer. It could also reduce the workload of the Financial Ombudsman Service, which has received very many complaints about PPI and, in particular, single premium PPI. PPI complaints to FOS have increased dramatically in the last two years and currently amount to over 500 a month.The findings are unlikely to come as a shock to the UK’s high street banks. Alliance & Leicester, Barclays, Co-operative Bank, Lloyds Banking Group and RBS/Natwest had already pre-empted the Commission’s report by ending the sale of single premium PPI on unsecured personal loans at the end of January 2009.
What next for PPI?
The regulatory focus is likely to remain on PPI for some time. Following recent criticism from the Treasury Select Committee about dragging its feet over the mis-selling of PPI, FSA is likely to take robust action over any failings. It is particularly likely to act if it considers firms to be in breach of its Treating Customers Fairly initiative or to be using unfair terms in their policies. It is also noteworthy that, immediately after publication of the Commission’s report, FSA reminded firms of the need to comply with the conduct of business requirements relating to PPI in the FSA Handbook.
The £7 million fine imposed on Alliance & Leicester in October 2008 for PPI mis-selling serves as a stark reminder of the issue’s importance. As part of the remedial action agreed, Alliance & Leicester has agreed with the FSA to carry out “a substantial and comprehensive customer contact programme, overseen by third party accountants”. Alliance & Leicester will probably have to make substantial refunds following this exercise going back as far as January 2005.
The forthcoming ban on single premium PPI and point of sale PPI will not affect the right of customers to make a claim to the FOS about the sale of those products before the ban came into effect. FOS is upholding four out of five complaints about single premium PPI and this is unlikely to change much before the ban comes into effect. The risk of PPI complaints to FOS is likely to be greater now that the Commission has published its final report, given the widespread publicity the investigation has received. The implementation of the Commission’s remedies may also lead to a further surge in claims about alleged breaches of the new requirements. FOS claims can affect a provider’s entire book and have a limitation period of six years.
The bans on the sale of single premium PPI and on the sale of PPI at point of sale are likely to make a significant dent in providers’ and intermediaries’ profits. In the short term, many lenders may respond by increasing the cost of credit. There is likely to be some shift towards the sale of alternative products, particularly GAP insurance in the case of car finance (though the fact this product is quite profitable for providers may eventually attract scrutiny). Some providers may wish to consider other products with a less troubled past than PPI, including short-term income protection, personal accident insurance, income protection, critical illness insurance, life (whole of life) insurance, term life insurance and decreasing term life insurance. Providers and intermediaries who sell PPI need to decide what effect the Competition Commission recommendations will have on the way they do their business. Anyone who decides to continue to sell PPI will have to make major changes to their sales processes and customer documentation. Of particular concern is the implementation date of April 2010 for the information remedies. Firms will need time to change their processes and IT systems and will need to start planning for this soon.