The Death Of Rip-off Insurance?

The Competition Commission has released its findings into the sale of loan insurance. This is bad for banks but brilliant for borrowers!

After 5½ years of waging a personal crusade against payment protection insurance (PPI), I'm hopeful that, at long last, we have this rip-off on the run!

This morning, the Competition Commission released its long-awaited report outlining its provisional findings into the multi-billion-pound market for payment protection insurance. (PPI meets the monthly repayments on a loan or other credit agreement if a policyholder is unable to work due to accident, sickness or unemployment.)

The Commission warns that lenders face little or no competition when selling PPI to their borrowers. Hence, the watchdog has concluded that customers are being overcharged by at least £1.4 billion a year.

An unashamedly unfair market

The big problem with PPI is that it is almost always sold alongside the credit agreements it protects. So, lenders have exclusive access to applicants taking out loans, credit cards, mortgages and other consumer credit. 

Naturally, temptation proves too great, leading lenders to charge as much as they possibly can for this cover. Hence, low levels of competition lead to artificially high prices for consumers.

The campaign against PPI really gathered momentum in September 2005, when Citizens Advice made a super-complaint to the Office of Fair Trading (OFT). After concluding that PPI gave customers a raw deal, the OFT referred this market to the Competition Commission in February 2007. Thus, any remedies in favour of the consumer will be at least four years in the making.

Although the Financial Services Authority (FSA) has fined ten naughty PPI providers a total of more than £3 million, this is a drop in the ocean compared to the money being made. What's more, complaints about PPI to the Financial Ombudsman Service (FOS) are soaring, which indicates the level of consumer dissatisfaction.

As a result, the Commission has hinted at a possible ban on selling PPI to borrowers at the point of sale. Having worked in the PPI market for eleven years, I know that this would prove disastrous for greedy lenders. In my experience, using hard selling at the point of sale, it is possible to sell PPI to up to eight out of every ten borrowers. However, resolicitation (trying to sell PPI to customers later down the line) produces inferior results, with perhaps than one in ten borrowers taking the bait.

Another option which the Commission is set to explore is the imposition of temporary price caps on PPI premiums.  Price capping would forcibly reduced prices until improved competition brought them down to a reasonable level. This is something I have strenuously argued for since 2002, on the basis that banks cannot be trusted to behave fairly when vast profits are under threat.

As well as price caps and point-of-sale restrictions, another remedy suggested by the Competition Commission is to standardise advertising and marketing material for PPI. This would make it easier for borrowers to compare policies, and would encourage them to shop around before buying.

The Commission also warned that PPI providers don't bother to compete with each other on the quality (as well as the price) of PPI policies. Furthermore, they make no effort to win customers from each other through direct advertising. Also, the Commission noted that the four biggest PPI insurers underwrite two-thirds (67%) of the entire market. This level of market concentration raises concerns over the level of competition, and is probably harmful to consumers. Thus, in many ways, PPI providers act as a cartel, stifling competition while banking excessive profits.

A crackdown to improve choice

PPI for personal loans is bundled into the cost of the loan, in a process known as `assumptive selling'. Thus, borrowers find it difficult to work out the true value of loan PPI. 

Thanks to the lenders' stranglehold over this market, customers have little or no choice of PPI policies. In addition, they are not told that alternative, cheaper policies are available, and so rarely shop around.

The upshot of all this is that PPI adds between 12% and 33% to the cost of a loan, so the premium usually exceeds the interest charged!

At present, loan PPI policies are sold as an upfront premium, which is added to the loan and attracts interest at the same rate. This is the most expensive and unattractive form of PPI, accounting for perhaps half of the entire market. 

To tackle this single-premium scam, the Commission may require loan PPI policies to be renewed yearly. This annual renewal would remind policyholders of the cost of PPI and the fact that it can be cancelled.

You can help win this battle!

By my reckoning, greedy PPI providers snatch an average of £240 a year from each of the UK's 25 million households. Accordingly, only by working together can we stamp out this swindle.

Since leaving the PPI industry in 2002, I've repeatedly `blown the whistle' on its unfair practices. Now it's your turn, as the Competition Commission wants to hear consumers' views on PPI. If you've been let down or ripped off by a PPI policy, then email PPI@cc.gsi.gov.uk or write to:

The Inquiry Secretary (PPI market inquiry)

Competition Commission

Victoria House

Southampton Row

London

WC1B 4AD

Finally, I'll leave you with the Quote of the Week (from the British Bankers' Association):

"I don't necessarily see that we have been overcharging [for PPI] at all."

Wow, what planet is the BBA living on? Perhaps BBA actually stands for Barely Believable Alliance?

More: Bad News For Banks And Borrowers | Reclaiming Rip-Off Insurance Premiums