How PPI missed the point

Lloyds Banking Group’s move to stop selling payment protection insurance is being seen as the beginning of the end of PPI products.

The bank stopped PPI sales across all its retail brands last month, citing uncertainty of regulation and saying it was uneconomic in the current environment.

The move delighted consumer group Which? with chief executive Peter Vicary-Smith who says: “Lloyds’ decision to stop selling PPI is a huge victory for consumers. Hopefully, other banks will follow suit and we will finally see the back of this poor protection product.

“Now it is the beginning of the end for PPI, banks need to get back to the drawing board and offer their customers insurance products that actually protect them when they need it.” creator Martin Lewis says: “This insurance has been scandalously missold for years, leaving many consumers in misery. We are jumping for joy at this news and we hope other banks follow suit.”

Lloyds says the decision was prompted by regulatory changes and a lack of profitability of the product.

It said: “This move reflects the uncertainty over the regulation of PPI sales and process. The group continues to believe further changes in regulation will make it uneconomic to continue to offer these products in their current form.”

The changes to the regulation are going to come from proposals set out by the Competition Commission following its long running investigation into the sale of PPI. Lloyds’ decision to withdraw from the PPI market comes only two months after the Competition Commission upheld its provisional decision to ban the sale of PPI at the point of sale of other financial products.

The commission had originally proposed pointof-sale restriction, along with several other measures, in July 2009 but Barclays appealed against this plan and the appeal was supported by Lloyds.

After reviewing the proposal, the commission confirmed its decision to ban point-of-sale business and said the benefits of introducing the restrictions outweigh the drawbacks and it expects the costs of PPI to reduce as a consequence.

Vicary-Smith: ’Now it is the beginning of the end for PPI, banks need to get back to the drawing board and offer their customers insurance products that actually protect them when they need it’

Competition Commission deputy chairman and PPI inquiry chairman Peter Davis says: “We found that many customers would place very significant value on being given the time and space to choose the right PPI product – or indeed to decide that PPI is not right for them.

“We also found that a significant number of customers appreciate the convenience of buying PPI instantly at the point of sale of credit. Overall, we concluded that PPI providers are overstating the loss of convenience that would result from the introduction of a prohibition on selling PPI during the credit sale.

“All customers, of course, will appreciate the lower prices for PPI and the greater choice we expect to result from more competitive PPI markets.”

The commission’s final verdict is due to be published by the end of September and a detailed outline of measures it expects PPI retailers to meet will be introduced very shortly afterwards.

Lloyds’ decision is perhaps the most high-profile move away from the sale of PPI but the bank is not alone in restricting its exposure to PPI. Some banks have limited its sale only to mortgage borrowing. Several other banks, including RBS and NatWest and Santander, are currently reviewing the continued sale of PPI. head of banking Kevin Mountford says the sales restrictions about to be imposed by the Competition Commission will combine with the continued fallout from complaints about the misselling of PPI and that this combination could lead to other banks heading for the exit.

Recent figures from the Financial Services Compensation Scheme show that PPI has become a growing area of complaints.

The latest annual report from the FSCS says that the number of claims relating to general insurance rocketed in the last financial year to 2,513 in 2009/10 up from 740 claims the previous year. Of these complaints, 2,411, 96 per cent, related to the sale of PPI.

In his introduction to this year’s report, interim chief executive Alex Kuczynski says: “We experienced a significant increase in PPI claims during 2009/10, receiving more than 2,000 claims. This is a growing area of our business. It features prominently in the current financial year and is likely to feature next year.”

Mountford says this combination of factors has made the product less and less attractive for the banks. “Naturally, the margins have been squeezed over time and organisations such as Lloyds and others, they are not the first, have decided that a: maybe it is not cost-effective and b: it is not worth the reputational risk.

“I don’t think Lloyds is the first but I don’t think they will be the last.”

However, the withdrawal of the banks from the PPI market could bring problems.

Martin Lewis says it is the sales process rather than the product which is the problem. “The product itself is not bad, it can provide useful protection to people if they are sick or lose their jobs as it cover their repayments.”

Mountford says the proposal set out by the Competition Commission could mean that rather than buy cover from an independent, cheaper provider, more people simply will not take out any protection at all.

He says: “My main concern is that if nobody ever sells these products in an appropriate manner, then there are consumers out there that are going to be left short. Who will be picking up the slack from the banks? After that cooling-off period, trying to re-solicit that business, by whatever means, will be very difficult.

“It is unfortunate that the point-of-sale process was driven too much with sales in mind and not enough with the consumer needs in mind. But if they had got the balance right, then point of sale would still be around.”