OFT To Probe UK Payment Protection Insurance

by Robin Pilgrim, LawAndTax-News.com, London

06 April 2006

The UK's Office of Fair Trading has launched a market study to look in depth at the payment protection insurance (PPI) sector. The study follows a super-complaint from Citizens Advice (CitA) to which OFT responded on 8 December 2005.

PPI is applied to a number of credit products including mortgages, loans and credit cards and protects a borrower's ability to keep up the payments on the loan in case of accident, sickness or unemployment, usually for 12 months or sometimes longer. Around 6.5 to 7.5 million policies are taken out each year generating premium income estimated in 2003 at GBP5.4 billion.

On 13 September 2005 CitA submitted a super-complaint to the OFT about PPI. It was based upon the CitA report 'Protection racket: CAB evidence on the cost and effectiveness of payment protection insurance'. CitA stated that the evidence presented in its report suggested that the features of the PPI market seriously harmed the interests of consumers.

The OFT response to the super-complaint identified a number of issues which pointed to the sector not working well for consumers and which indicated the need for a more detailed examination. These issues were:

• consumers face difficulties in getting information they need about alternative suppliers and the information available is often too technical to be understood easily;
• there are high costs or other barriers to entry for stand-alone PPI providers;
• there is a wide degree of variation in pricing in the sector;
• gross profit margins appear high - PPI claims ratios are low compared to other general insurance products.

The market study will examine these issues in more detail and will also look at:

• the relationship between the various players who supply PPI (lenders, insurers, intermediaries) and how this affects the sector;
• how the product is sold to consumers and what influences their choices;
• consumers' experiences of making claims;
• the impact exclusions have upon consumers' ability to shop around;
• consumer awareness and understanding of exclusions.

The market study gives OFT the opportunity - which it did not have during the super-complaint - to look more carefully at the outcomes of the Financial Services Authority (FSA) thematic work on PPI and the Competition Commission work on store card PPI and assess the impact of their work on the sector. Both have played a key role in influencing the direction of the OFT's work, and the OFT will continue to work closely with the FSA in this area. The study will look at the scope for a coordinated strategy by the OFT and FSA for regulating PPI and related credit products.

The OFT will consult widely with the industry - a business survey will be sent out shortly to lenders, insurers and intermediaries. A detailed survey of consumers will also be carried out.

The OFT expects to publish its report by the end of 2006.

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