The payment protection insurance market has long had a bad press with allegations of mis-sold policies and the overcharging of customers. Katie Puckett asks whether the Competition Commission’s attempts to remedy this deeply unpopular product will have the desired effect.

Finally something is to be done about the payment protection racket. Insurers have long had to stand by and watch as banks milked the market for huge profits, while the reputation of the entire industry took a battering from serial complaints of mis-selling.

Now the Competition Commission has suggested a range of remedies that could open up the market and give consumers more choice. Unfortunately, what should be good news for the insurers and brokers is, they fear, in danger of killing the market altogether.

The Commission’s provisional report, published earlier this month, found that lenders’ stranglehold on the market meant that the 12 largest providers are overcharging customers by more than £1.4bn a year, on a combined premium of £3.5bn. Payment protection insurance (PPI) is by far the most unpopular insurance product among the public, with complaints to the FSA reaching record levels in January – four-fifths of them being upheld.

A Which? survey also published in June found that a third of customers who’d taken out PPI policies stood no chance of ever claiming on them. This meant, it said, that as many as two million policies could have been mis-sold. The Commission found the payout rate on PPI is low – between 11-28% depending on the product.

The FSA regularly hands down fines to lenders who have broken the rules but the amounts are a tiny fraction of their profits. In January, for example, HFC was fined £1,085m for its cavalier approach to selling a total of 163,000 PPI policies – less than £7 per customer. And that was supposed to reflect a new toughness on the part of the FSA.

“When you think of the turnover and profits that banks make, it’s a drop in the ocean,” complains Steve Foulsham, technical services manager at the Biba. “The bigger view here is that banks have used their position to operate to the detriment of the rest of the industry. PPI gets a bad press, but it’s not really the broking market that’s been selling the product. We all know it’s directed at one particular channel.”

Analyst Defaqto estimates that the UK PPI industry is worth between £4.4bn and £5.5bn a year, and the vast majority is sold by the lenders, usually bundled in with loans, credit cards or mortgages at the point of sale.

It’s the lenders’ stranglehold on the market that the Competition Commission wants to break. “Customers are paying for the lack of competition,” said the inquiry’s chairman Peter Davis. “The way 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.”

The remedies the inquiry has suggested fall into four categories – increasing competition between providers, addressing the point of sale advantage, removing barriers to switching products and cutting high prices of lenders’ PPI.

The simplest is standardising the information lenders are required to give customers about PPI, so they are aware cover is optional and can compare prices in the market. Many customers don’t realise they have a choice of policies and there is a widespread belief that taking out a lenders’ PPI policy directly affects whether or not their application will be successful, something the banks seem to encourage.

“We definitely think people should be covered and make sure they are properly protected but they should take a more holistic view. PPI just does not do the job, it is a bad product.

Lucy Widenka, Which?

Brian Brown, head of insight at research company Defaqto, experienced this first hand recently when he applied for a loan over the phone. “The sales process leads people to believe they will have a better chance. When I said I didn’t want PPI, she asked me all sorts of questions about my life insurance and my wife’s income. I went along with it out of curiosity. It was a 20 minute phone call, and it was clear the loan hadn’t been approved before we talked about PPI.”

More than half of banks’ profits on PPI are made on unsecured personal loans, and agents earn high commissions – sometimes up to 80% - for selling them. If you decline PPI you can expect a barrage of intrusive personal questions, but taking out the cover often requires no more than a tick in a box. Lenders do not ask essential questions that would determine whether customers are actually eligible for cover in the first place or discuss the scope of the expensive policies consumers are buying.

“The assumption in the past is that when lenders pass customers to the insurers, they’ve already checked their employment status and medical records, but it’s not happening,” says Brown. “It’s only later when a problem emerges and then it’s quite unpleasant because the customer’s been relying on the insurance to pay their mortgage or debt.”

He believes more and more underwriters taking on PPI customers from lenders will be making calls to customers at the point of sale to check they are eligible.

When the ABI submits its response on behalf of the industry by the June 30 deadline, it will be giving the thumbs up to the Commission’s suggestion of standardised information. “We want customers to be able to make an informed choice,” says Nick Kirwan, director for health and protection at the ABI. “Clearer information so people can compare one thing with another is a good thing that will work to the benefit of the insurers.”

Shane Craig, managing director of online PPI broker, agrees: “I’d like lenders to be forced to read a disclaimer out when discussing PPI with prospective customers. It wouldn’t cost anything for that to be introduced. Competition is restricted because lenders always have the point of sale advantage. Anything that stimulates consumers’ minds and alerts them to the fact that they have a choice is good.”

Brown also believes outlawing single premium policies would work in insurers’ favour. In the majority of cases, PPI is added as a lump sum to the loan upfront. This adds to the interest consumers pay and makes comparison of products very difficult. If they do decide to switch halfway, they may be hit with penalties or find they get much less back than they were expecting as the risk is loaded in the early months of a policy. The Commission suggests banning single premium or forcing lenders to offer the choice of periodical premiums instead.

“If you move to monthly premiums, it’s essentially income protection and people can compare prices,” says Brown. “For obvious reasons lenders are quite resistant to it.”

But the Commission’s more dramatic sanctions have not gone down so well. One proposal is that the sale of PPI be banned within a fixed time period of taking out a loan. “If customers want to take out insurance, that’s going to make it quite difficult,” Kirwan points out. “It isn’t obvious to me that it will increase competition.

Only the person who set up the loan knows about it, so no one else can get in touch with them. How does that increase competition? I’m worried that fewer people will have the protection they need. I think people tend to make the decision at the time, and three months later they won’t be very interested.”

“The danger is that if you give people the choice, they will choose not to take the PPI at all and in the current economic climate, that is not such a great thing.

Brian Brown, Defaqto

Neither is he enthusiastic about the idea of a price cap on policies. “That’s obviously quite a draconian measure, it’s a substitute for having a competitive market and it’s difficult to see how it would work,” he says. Kirwan fears the law of unintended consequences which could see lenders merely cut back the cover they offer and leave consumers even more at risk.

This is where the insurance industry and consumer groups such as Which? and Citizens Advice concur. Lucy Widenka, campaigns project manager at Which?, supports the separation of credit agreements and insurance cover, but does believe people should take out appropriate insurance. “We definitely think people should be covered and make sure they’re properly protected but they should take a more holistic view. PPI just doesn’t do the job, it’s a bad product. We understand there is a problem in getting people to understand the importance of protection and we all need to look for better ways to make people aware.”

Brown also believes that the industry has been slow to counter the bad press PPI has drawn – insurers’ notorious shyness

of datasharing has held them back. “We think the industry should be better at telling customers what it does and how it works. It should say: ‘Did you know we paid out four or five or six hundred claims last year, these are people who didn’t have their car repossessed.’ But the industry is very bad at sharing information. All these numbers are a closely kept secret.”

It seems unlikely that insurers are going to be prepared to break the habit of a lifetime and start sharing claims data as the Commission proposes.

A commonly expressed fear among insurers is that the Commission risks throwing the baby out with the bath water. “If people are turned off, they won’t buy it at all and they’ll leave themselves at risk,” says Brown.

By encouraging a stigma of PPI, there’s also a knock-on effect to products such as critical illness and income protection. “Customers will become distrustful of anything with protection in it. The danger is that if you give people the choice, they will choose not to take the PPI at all and in the current economic climate, that’s not such a great thing,” adds Brown.

Biba’s Foulsham agrees: “There’s a very real need for PPI. With the credit crunch, many people will struggle to pay their mortgages and could end up losing their jobs as well.

All we’re asking is that customers get enough information at the point of sale, so they’re aware they have a choice. When sold the right way, PPI is probably even more important than ever."