OFT calls for competition inquiry into payment protection insurance market
THE FINANCIAL TIMES - 10TH FEBRUARY 2007
The investigation into the competitiveness of the market for payment protection insurance, which covers loan repayments in the event of illness or redundancy, took a giant leap forward this week when the Office of Fair Trading called on the Competition Commission to conduct its own formal investigation.
In a lengthy report, the OFT indicated it referred its investigation to the commission after evidence was found that "features" of the payment protection insurance market "prevent, restrict or distort competition and lead to poor value for consumers".
The referral will enable the commission to put appropriate remedies in place to improve the payment protection insurance market if necessary, the OFT said.
John Fingleton, chief executive of the OFT, said: "Our examination of the evidence presented to date gives us reasonable grounds to suspect that there are features of this market which restrict competition to the detriment of consumers."
Payment protection insurance protects mortgage or loan repayments when individuals are unable to work through illness or redundancy. About 6.5m payment protection insurance policies are taken out each year, but premiums are high and in many cases individuals never make a claim. The OFT has indicated that consumers could save Pounds 1bn if the Pounds 5.5bn market became more competitive.
The payment protection insurance market has been subject to intense scrutiny by the Financial Services Authority, the City regulator, and the OFT after it was found that some providers were marketing the insurance too aggressively and selling it at too high a price.
The FSA has launched a campaign to improve the standards of the market. Just last week, the FSA fined GE Capital Bank a record Pounds 610,000 for neglecting to train and supervise shop workers selling payment protection insurance along with store cards. More groups are expected to receive similar treatment in the coming weeks.
This week, standalone providers of payment protection insurance - which is often marketed via mortgage or credit card providers - applauded the OFT's decision, viewing it as a step to open up the market to competition.
"We very much welcome this," said Simon Burgess of British Insurance. "For too long consumers have been coerced into paying over the odds for their insurance, via their loan providers. Lenders intimate that those who take out payment protection insurance cover are more likely to secure a loan which is outrageous. I'm delighted that moves are underway to stop these underhand selling tactics."
The difference in the cost of payment protection insurance between that purchased from an independent broker and ones with relationships with mortgage or credit card lenders can be quite dramatic.
A policy from British Insurance, based on a loan of Pounds 10,000 over five years, is available for as little as Pounds 7.80 per month while ones offered by Abbey and Northern Rock cost Pounds 49.98 and Pounds 53.06 respectively, according to data from Moneyfacts.com, the price comparison website.
While high street banks and building societies account for about 80 per cent of all payment protection insurance policies sold, consumers would be better served if they shopped around for standalone policies, analysts say.
Some of the more expensive policies include life cover, which might not be necessary if consumers already have it.
"The fact that high street banks and building societies dominate the sale of payment protection insurance policies is understandable as they enjoy a huge point of sale advantage," said Nick White, director of financial services at uSwitch.com, the price comparison website.
"Consumers must become better at being consumers. . . . . They should always ensure that they understand what is covered in the terms of the contract by reading the small print and that the policy meets their requirements, whilst ensuring that they do not over insure."
