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PPI ban could leave borrowers exposed

The Competition Commission’s proposed crackdown on sales of payment protection insurance could destroy the market and leave consumers without protection, warns the Association of British Insurers.

The commission has recommended banning the sale of PPI alongside loans and credit products after its research found that consumers are being overcharged by more than £1.4bn a year.

In a report published last week, it outlines plans to stimulate competition and lower prices by stopping firms selling PPI at the point of sale. It is considering a price cap as a temporary measure to reduce prices and has proposed a ban on single-premium policies.

The probe found that the vast majority of the 14 million PPI policies were sold when a consumer took out a loan or credit product. It says firms face little or no competition when selling PPI to their credit customers who rarely shop around for the best deal and the lack of competitive pressure means banks, lenders and credit providers can charge higher prices.

CC deputy chairman Peter Davis, who chaired the inquiry, says: “The way that 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 do not appear to compete much with each other either on price or quality of PPI.

“We are consulting on a range of possible measures to ensure PPI customers get a better deal by emphasising their right to choose, improving their ability to compare prices and products and making sure they are making a considered and informed decision when they take out the cover.”

Davis says there is evidence that some personal loan firms are charging high prices for PPI to subsidise the interest rates being offered.

He says: “When considering what action to take, we will have to consider to what extent cross-subsidy is an important customer benefit and weigh that against the obvious disadvantages of high PPI prices and lack of choice that the evidence strongly suggests that consumers are suffering from.”

Association of British Insurers director of general insurance and health Nick Starling believes the proposals could destroy the PPI market.

He says: “It would be disastrous to leave many people unprotected to deal with unforeseen financial crises. 
 PPI is an optional product available from a range of different providers and it is vital that customers understand precisely what their policy covers. If they are comparing products, it is important they examine all their features and benefits, not just prices.”

British Bankers’ Association chief executive Angela Knight says some of the recommendations could leave customers exposed at a time when economic conditions are worsening. She says: “The industry has moved on since the research has been carried out. Customers are better able to shop around and make comparisons, there is more choice around and customers are provided with a separate document showing key facts before they take out the policy.”

But Financial Services Consumer Panel chairman Lord David Lipsey welcomes the proposals. He says: “The FSA has been tackling the regulated aspects of PPI and we see a clearer exposition of the competition issues in the report. The consumer panel greatly welcomes the attention which the CC has given to this issue.”

Which? personal finance campaigns manager Doug Taylor says PPI is generally a bad product which is inappropriately sold. He says: “We have been saying it for 10 years and we are delighted we have been vindicated. Our research shows that, in the last five years, up to two million policies have been missold. Surely, it is time to stop talking and start cleaning up this industry once and for all?”

Stuart Glendinning, managing director of Moneysupermarket.com, warns that the downside to lower PPI prices is that personal loan interest rates will rise. He says: “I expect this to happen quickly if the CC presses ahead with its proposed changes.”

CMS Cameron McKenna financial services partner Simon Morris says the CC’s proposals show no grasp of how business works. He says: “People who buy a loan product are highly unlikely to want to shop around for insurance against future inability to pay. They will be the losers if the unexpected occurs. The objection that PPI is sold as an add-on is as absurd as saying that a car should be sold without tyres so that the motor-ist can then shop around for a better deal.”

Savills Private Finance associate director Melanie Bien says the proposals are positive as most people do not realise they have a choice of PPI provider but she adds: “The downside is that people might forget or not get round to buying PPI and then not have the cover that they need.”

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