Page last updated at 10:21 GMT, Thursday, 13 November 2008

Loan insurance 'delay' proposed

Credit card
A number of providers have been fined for PPI mis-selling

Controversial payment protection insurance (PPI) should not be sold to a customer within 14 days of being sold a loan, the Competition Commission says.

PPI should ensure that people can still repay loans such as mortgages or credit card bills if their income falls when they lose their jobs or fall ill.

Planning a crackdown, the Commission estimated that 1.4bn of "excess profit" was made by the PPI in 2006.

But the proposals have been criticised by groups representing PPI providers.


PPI has been mis-sold in the past, with customers unaware they were buying it.

Preventing customers from buying PPI when they take out new credit will mean that many vulnerable people go unprotected just when unemployment is rising sharply
Stephen Sklaroff, Finance and Leasing Association

The sale of this insurance has been under sustained attack from consumer groups for the past three years, who have described it as little more than a "protection racket".

The Commission said that the vast majority of more than 13 million PPI policies in the UK were sold at the same time as a consumer would take out the loan or been given other credit.

But at this point the banks, mortgage providers or credit card companies faced little or no competition, with consumers unaware they could buy PPI elsewhere.

This meant that the providers were able to charge high prices.

The Commission said that the proposed 14-day window would allow customers to shop around for PPI.

Customers would still be able to take the initiative and contact a loan company within 24 hours of getting a loan if they wanted PPI from that company.

It suggested that providers be offered a "personal PPI quote" that outlines the cost of taking out the insurance. It wants a ban on "single premium" policies which stop customers being able to switch, because it is, in effect, paid for upfront by adding it to the total debt.

It also called on providers to make advertising clearer, to give information to the Financial Services Authority (FSA) for a comparison table and an annual report for customers helping to decide whether to switch.


However, the Commission's proposals have come under fire from groups representing providers.

Mortgage application form
Mortgage providers are among those facing the planned crackdown

"Preventing customers from buying PPI when they take out new credit will mean that many vulnerable people go unprotected just when unemployment is rising sharply," said Stephen Sklaroff, director general of the Finance and Leasing Association.

He added that the loss of single-premium PPI would also result in "worse terms" for many customers.

He warned that the proposals would raise the cost of credit, ignoring concerns about rising interest rates on credit cards.

The Association of British Insurers said the 14-day ban would leave "millions of consumers unprotected".

"By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong," said Nick Starling of the ABI.

The British Bankers' Association said: "It is totally without conscience to encourage people to borrow without back-up. The Competition Commission has gone well beyond its remit."

But Shane Craig, of independent PPI provider, praised the Commission for the proposed ban on single-premium PPI policies - describing them as "a major obstruction" to consumers getting a fair deal.

And Teresa Fritz, personal finance expert at consumer organisation Which?, welcomed the Commission's report.

She told the BBC that Which? believed up to two million people had rushed into buying PPI only to find that they could not claim on the policy, owing to exclusions in the small print.


The Financial Ombudsman Service (FOS) recently demanded that the FSA take action to stop banks fobbing off customers who had complained to them about PPI being mis-sold.

It said this had led to it receiving a deluge of complaints from the public.

The FOS is still getting 100 complaints a day, far and away the biggest source of grievances.

In its first report earlier this year, the Competition Commission estimated that the public paid PPI premiums in 2006 amounting to 4.4bn, most of which went to the banks and other financial institutions who sold the policies, rather than the underwriting insurers.

Of the 3.5bn worth of the insurance sold by the 12 largest sellers, 1.4bn was "excess profit", in the Commission's view.

The FSA has been taking an increasingly strong line against firms found guilty of mis-selling PPI. Earlier this year, it fined the Alliance & Leicester bank 7m after it found that the lender's staff had pressurised customers into buying PPI policies that they did not want or need.

The Competition Commission said it was putting out today's recommendations for a final round of consultation.

A final decision will not be made until the publication of its final report in the mid-January.

In a separate report last month, the Commission said the market for protection insurance for repayments for shopping through home catalogues was also short of competition.

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