PPI - OFT consults on market reference to the CC & FSA reports on thematic work

United Kingdom

For background please see previous law-now articles Criticism of the payment protection insurance market, FSA update on payment protection insurance, OFT announces market study into payment protection insurance and FSA and payment protection insurance – the latest.

On 19 October 2006 the Office of Fair Trading announced that it intends to refer the payment protection insurance market to the Competition Commission for a full-scale review of the market and how it functions.

The OFT is consulting on its intention to refer until 30 November 2006, so if you want to make any comments, you should act promptly. The key issue is whether to include PPI on store cards within the reference (the Competition Commission having already investigated the store card sector). The other sectors - PPI on mortgages, credit cards, unsecured loans (personal loans, motor loans and hire purchase) and secured loans – are all to be included.

The OFT has set out a number of reasons why it believes the PPI market should be reviewed by the CC. These are very similar to its “emerging issues”, which were discussed with the insurance industry at a feedback session in August this year. The reasons focus on the following issues:

  • consumers’ understanding of PPI, how they purchase their PPI and the quality of information available to them, which the OFT believe hinders competition;
  • competitive pressure at the supplier level does not in the OFT's view appear to be feeding down to consumers;
  • claims ratios for PPI are low compared to other insurance products and costs do not seem to be high. The OFT's emerging issues paper raised concerns that PPI providers could be making very high profits, whilst customers were receiving poor value. It also believes that high commission rates for PPI compared to other products reinforce this conclusion.

The OFT particularly noted in its announcement that the point of sale advantage enjoyed by distributors hinders competition at the key point at which the consumer buys the insurance. It also believes that stand-alone providers have difficulty entering into the PPI market.

Any CC reference made in this case could last up to two years and could result in the CC imposing new rules on the sector.

FSA report

The OFT has been liaising closely with the Financial Services Authority in this area and the FSA published on 19 October 2006 'The Sale of Payment Protection Insurance - results of follow-up thematic work'.

The report acknowledges that a number of firms have taken steps over the past year to improve PPI sale standards. However, there remains three key areas of widespread concern:

  • Many firms are still not giving customers clear information during the sales conversation: some are not making it clear that PPI is optional and customers are not receiving full information about how much the cover costs.
  • Customers are still not being made fully aware that there may be parts of the policy under which they cannot claim. Furthermore, some firms are still failing to establish that the PPI policies they recommend are suitable because they are not collecting sufficient information from the customer - for example, about any existing cover they possess.
  • Where customers are sold single premium policies, this is not always done with the best interests of the customer in mind - for example, where a choice between regular and single premium is available, the sales conversation may be biased towards a single premium policy when the customer's circumstances suggest this is not suitable.

FSA have found that firms that do not have financial services as their main line of business and sell PPI as a tertiary product have generally poor compliance. However, the FSA are not merely concentrating on such firms.

The FSA warn that due to the continuing problems with the sale of PPI as evidenced by the work the FSA and OFT have undertaken, further regulation of the PPI market may be prescribed. If such regulation is to be prescribed, it will emerge in the review of ICOB sourcebook - timetabled to be consulted upon in the first quarter of 2007.

For the FSA announcement, please click here. For the FSA's PPI report, please click here.