As expected, the Office of Fair Trading (OFT) has announced that it is to carry out a market study, to be launched in early 2006, to look at the payment protection insurance (PPI) market in depth. The decision was announced shortly before the expiry of the 90 day statutory period for the OFT to respond to the Citizen Advice super-complaint. The launch of the market study gives the OFT more time to investigate but also to consider the conclusion and recommendations of the Competition Commission (CC) report, due in January, in relation to PPI in the store card sector. A further reference to the CC will be necessary if competition based measures are to be imposed on PPI sales in other sectors.
The OFT announcement followed September's super-complaint from Citizen's Advice which highlighted various concerns, including:
- consumers pay too much for PPI
- PPI offers inadequate consumer protection, with many policies excluding common causes of financial difficulty
- frequent mis-selling of PPI
- PPI claims administration can be slow and inconsistent, leading to increased consumer debt and enforcement action
The OFT has decided to carry out a market study due to a number of factors which point to a potentially high risk of consumer detriment, including:
- the industry size – around 6.5-7.5 million policies are written each year, yielding an estimated £5.4 billion in premium for 2003
- product complexity – especially when coupled with, frequently, limited understanding on the part of the consumer
- the selling process – PPI is often sold as a secondary product
The exact scope of the market study will be determined in early 2006, after the CC has reported on store cards and the sale of related PPI in that sector (for further detail on the CC's provisional findings, see our Law-Now, 'Criticism of the payment protection insurance market' accessible via the link below). In its preliminary findings the CC indicated it was considering,
"measures aimed at providing greater choice for customers in selecting insurance products to match their needs and which would enable each element of the insurance package to be compared with competitor offerings" and "a requirement that if providers offer 'packages' of two or more elements of payment, purchase and price protection insurance, they should offer each element to store card customers separately."
In considering its response, the OFT has highlighted a number of features of the market which suggest it is not fully competitive and which the market study is likely to focus on:
- consumer difficulties – in gaining information which is needed about alternative PPI providers and the technical nature/lack of transparency of the information which is provided
- high cost and other barriers to entry – stand-alone PPI providers face the difficulties already identified by the CC in the store card sector
- pricing – general variation of pricing in the PPI sector
- profit margins – high profitability, with claims ratios substantially lower than that of other general insurance products
In carrying out its market study, the OFT will also take in take into account other work which is being done in this sector; FSA released the results of its thematic work into PPI in November (see the link to our previous Law-Now, 'FSA update on payment protection insurance' below). The OFT acknowledges that it and FSA are aware of the need for a coordinated strategy, since PPI straddles both FSA and consumer credit regimes.
The OFT noted that during its consultation, a common industry response was that the introduction of the insurance conduct of business (ICOB) regulations had led to significant changes to the way PPI was sold, which should have reduced a likelihood of complaints such as those put forward by Citizens Advice. However, the OFT noted that the CC was clear that ICOB would not address three concerns, namely:
- he bundling of store card insurance and hence the lack of consumer choice
- the possibility that consumers might be paying for protection they no longer needed or were entitled to receive, and
- the lack of competitive pressure on this aspect of the store card package
The OFT really had no choice but to defer its final decision on whether to make a reference to the CC, this will mean further uncertainty for the industry. There are concerns about the lack of competitive pressure within the market, which are different from FSA's concerns about the regulatory regime, but, measures to enhance competition can only be imposed on the industry following a reference to the CC.
This update follows our previous Law-Now articles (Criticism of the payment protection insurance market released 29 September 2005 and FSA update on payment protection insurance released 4 November 2005).