Payment Protection Insurance – Competition Commission publishes final report

The Competition Commission (CC) has today (29th January) published its final report on its investigation into the Payment Protection Insurance (PPI) market. Click here to access the announcement.

As expected, the CC has maintained the main remedies it proposed in the provisional decision which it published for consultation in November last year. Click here if you would like to read our Law-now report on those proposals.

These include:

• A prohibition on single premium policies. Many banks have already indicated that they are switching to regular premium PPI as FSA noted in its “update on FSA work on the sale of PPI” released on 20th January. Customers with annual policies will be entitled to terminate mid-term and to receive a pro-rata premium refund.
• A ban on completing a sale of PPI at the same time that a loan or other finance is concluded (the point of sale ban). The distributor or intermediary will have to offer a “personal PPI quote” either when the credit is sold or later (showing the PPI cost individually and combined with the loan). There will be a standard basis for providing cost information and consumers will be encouraged to use this to ‘shop around’. The distributor or intermediary will not be able to contact the consumer to complete the PPI sale until seven days have elapsed since the personal PPI quote was provided. The CC has reduced the period of the ban from its original proposal of fourteen days. The consumer will be free to take the initiative and can conclude the purchase at their request after 24 hours, but only by telephone or internet; face-to-face sales will not be permitted until the secondary period has elapsed. The CC has included ‘anti-avoidance’ measures – for example to prevent ‘pre-selling’ of PPI.
• PPI price comparison tables will be published by FSA using information which PPI providers will be requested to provide.
• PPI providers will have to provide an annual statement to PPI policyholders which will be similar to the PPI quote; this is intended to encourage policyholders to “shop around” rather than staying with their original provider.
• Those offering PPI and merchandise cover combined must also offer PPI alone.

The CC expects the new rules to come into force during 2010 (April 2010 for information requirements and the other rules in November). It proposes to impose the requirements through a legally binding order rather than accepting undertakings or delegating to another authority. Compliance with the order will be monitored by the OFT.

Comment

Alternative products

The CC’s remedies may lead to banks and finance companies deciding to offer loans with ‘debt freeze’ terms instead of selling a separate PPI insurance policy provided by an insurer. The CC recognises this possibility, but says it does not have the power to extend the ban because its terms of reference are too narrow. Debt freeze and similar products are widely available in the US where banks were encouraged to offer these products to avoid the sale of separate insurance policies. The UK industry is now looking at introducing a similar range of products.

Interaction of the CC’s remedies and the FSA Rules

FSA has also today issued a statement (29th January) in which it provides some guidance on the continuing application of its ICOBS rules in the context of the new PPI sale processes which will operate when the CC requirements take effect. FSA highlights its continuing work and the possibility of new ICOBS rules. There are potential difficulties under the FSA’s current ICOBS rules because the CC’s requirements will split the sales process and this will result in some ICOBS disclosures being given to the customer twice – once at point of sale and again during the follow-up contact with the customer.

Analysis

The CC is relying heavily upon the emergence of a vibrant standalone PPI market, without this, its remedies will not achieve their intended result. However, the CC’s impact assessment seems to fail to take into account several key factors, in particular, how the market is likely to react to a point of sale ban in the current economic climate.

Economic recession

The CC’s enquiry started back in the days of a relatively strong economy and its final report has now been published during a major recession - a time when many people have a very real need for the cover PPI provides. There is already evidence of distributors and insurers choosing to exit the PPI market in light of current economic conditions and, in recent months, standalone providers of unemployment cover have become extremely scarce.

The likely response of distributors and insurers

Those customers who actively seek out standalone PPI are a self-selecting population (i.e. they take out the cover because they know that they are at risk) and these customers therefore present far more of an underwriting risk for the insurer. Experience shows that the claims ratios on standalone products are significantly higher than those on products that are sold at credit point of sale. A prevalence of this so called ‘adverse selection’ will inevitably result in premium increases and/or further policy exclusions with a consequent decline in product quality as insurers seek to cover the increased underwriting risk presented by this self-selecting population of policyholders. The ban on the sale of PPI at point of sale will also result in several players exiting the PPI market because they are unable to invest in the systems infrastructure necessary for them to be able to contact customers after the credit point of sale.

Consumer behaviour

The CC has failed to take into account consumer buying behaviour and the generally accepted principles of customer inertia – if there is a delay, the majority of customers who fully intended to take action will not follow that action through. A ban at point of sale will certainly result in far fewer people taking out PPI cover for their loans and mortgages at the time when arguably they need it most.