The Competition Commission will now have to change its plans
Plans to restrict the sale of the controversial payment protection insurance (PPI) have been dealt a blow.
The Competition Appeal Tribunal has told the Competition Commission to change its plan to restrict PPI sales at the point when loans are granted.
The appeal against this impending restriction was made by Barclays bank.
The Commission said it would study the judgement "closely" before deciding what to do next, but pointed out it affected just one part of its plan.
"The appeal was upheld on one ground which relates to our assessment of the remedy prohibiting the sale of PPI at the point of sale of credit," said the Competition Commission.
"The Commission has been asked to reconsider the loss of convenience for consumers of not being able to buy PPI at the same time as taking out credit."
In January 2009 the Commission outlined a range of limitations on the sale of PPI, which is supposed to enable people to pay off their loans, such as credit card bills or mortgages, if a borrower falls ill or loses their job.
The Commission said that from October 2010, lenders would be prevented from initiating the sale of a policy when they granted a loan, or for seven days afterwards.
This "point of sale" advantage was described by Peter Davis, deputy chairman of the Commission, as meaning that "leading providers have faced little competition for PPI and, as a result, have charged persistently high prices".
Barclays challenged the Commission's plan on four grounds, three of which related to the point of sale restriction.
The Tribunal agreed with the bank's argument that the intended restriction would disadvantage some customers who wanted to buy the insurance cover.
It said the Commission had not justified this part of its plan sufficiently and that the restriction was "a remedy without precedent".
"The Tribunal concluded that the Commission had failed to take into account the loss of convenience which would flow from the imposition of the point of sale prohibition in assessing whether it was proportionate to include it in its proposed remedies package.
"In the Tribunal's view, this constituted a failure to take into account a relevant consideration," it added.
The tribunal quashed that part of the Competition Commission's report which imposed the restriction and told the Commission to revise its plans accordingly.
Deluge of complaints
Despite this decision, the sale of PPI is already undergoing a widespread regulatory onslaught which will not be altered.
After years of complaints from consumer organisations, and a current deluge of complaints from people who think they have been mis-sold PPI polices, the authorities have been taking action:
• This month, mortgage lenders and insurers agreed to refund £60m to customers whose premiums for mortgage payment protection insurance went up this year
• In September, the Financial Services Authority (FSA) told banks and other lenders to compensate customers who may have been mis-sold payment protection insurance when selling "single-premium" PPI policies alongside unsecured personal loans
• At the same time, all financial firms were told to reopen 185,000 old complaints about PPI they had previously dismissed
• In May, the FSA told the banks, and other lenders who sell PPI, to immediately stop selling one version of the insurance, called single premium PPI, where the premiums are added onto the loan as an upfront lump sum.
The sale of PPI has been called a "protection racket" by consumer groups, as the policies can be very expensive and have been mis-sold to people who could never make a valid claim under the terms of their policies.
As part of its enquiries which led to the proposed ban, the Competition Commission found that in 2006, lenders made excess profits of £1.4bn when selling the insurance.
"It's a shame Barclays has succeeded in using its lawyers to delay the implementation of such an important ruling," said Martin Lewis of MoneySavingExpert.com.
"Bank-based PPI is a near con - it's hideously over-expensive, billions of pounds of it have been mis-sold, and the sooner it's cleaned up and cleared out the better.
"We desperately need a stop to this 'auto-sales' process, where commission-based bank staff try and push borrowers into getting these policies," he added.