Competition Commission stands by PPI point of sale ban

It believes the benefits of the ban outweigh any loss of convenience to consumers, who will have to wait at least 24 hours before they can buy PPI from the credit provider.

PPI covers payments due on credit products if the borrower cannot afford to pay because of an accident, sickness, unemployment or death. Currently, most PPI is sold at the same time as a personal loan, credit card, mortgage or second mortgage.

In January 2009, following an extensive investigation into the UK PPI market, the Competition Commission concluded that credit providers and intermediaries face little or no competition when selling PPI products to their credit customers, with the result that consumers have less choice and pay higher prices than they would in a fully competitive market.

The report set out a package of remedies, central to which was a measure prohibiting providers from selling PPI to the customer for seven days after a credit sale. PPI could only be sold during this period if the customer contacted the provider directly by telephone or online after 24 hours.

In October 2009, the Competition Appeal Tribunal upheld the Commission's conclusions on the problems in the PPI market but ruled that, in deciding whether the point of sale ban was proportionate as part of its remedy package, the Commission should consider further the potential loss of convenience to consumers.

The Commission has now provisionally concluded that its full package of remedies, including the ban, will bring about increased choice and lower prices for all forms of PPI, except possibly retail PPI, and that these benefits outweigh any inconvenience that might be caused to some consumers.

Retail PPI, which provides cover for repayments on goods bought via catalogues, represents only a very small part of the UK PPI market.

Alan Davis, competition law specialist at Pinsent Masons, the law firm behind OUT-LAW.COM, said the Commission was unsure whether a cooling-off period at point of sale was appropriate for retail PPI, so it has put forward some alternative remedies for discussion.

"Of some concern, however, is the fact that these potential alternatives include a price cap, possibly on a temporary basis while other remedies take effect," said Davis. "At one stage, a price cap was being considered for all types of PPI, but the Commission decided against it. Reintroducing it now for retail PPI effectively amounts to price regulation and would be an undesirable step".

Inconvenience

For PPI covering repayments on personal loans, mortgages, second charge mortgages and credit cards, the Commission acknowledges that the point of sale ban will cause some consumers inconvenience. But its investigations showed that, although some consumers preferred being able to buy PPI at the point of sale, a significant proportion put greater value on having time to consider whether or not to buy the cover.

And although, the Commission expects some drop-off in PPI sales because of the ban, it believes this would partly be due to consumers having had time to think about it and deciding they either did not want or did not need to buy PPI.

"We have carefully considered the arguments put forward by the parties and concluded that they are over-stating the loss of convenience that would result from the introduction of [a point of sale ban]," the Commission states in its provisional decision paper.

"To the extent that any decline in take-up of PPI is as a consequence of the elimination or reduction of unwanted sales at the credit point of sale… we do not regard those lost sales as indicative of any consumer detriment resulting from the [point of sale ban]".

Competition law expert Alan Davis is not surprised that the Commission has refused to back down from the remedy it originally proposed. "But whether the cooling-off period proves to be something consumers actually want remains to be seen," he said.

"There is a risk that it may put some consumers off from buying PPI at all, leaving them exposed. On the other hand, the Commission clearly does not see that as a bad thing if they didn't need it in the first place," added Davis.

Announcing the provisional decision on 14th May, Peter Davis, Competition Commission Chairman, said the Commission had done an enormous amount of additional work to examine whether the full remedy package remained an effective and proportionate way of tackling the problems in the PPI market.

"Obviously the financial services sector has experienced some significant changes since our initial report," Peter Davis said.

"We looked at the effect of the relevant aspects of those changes on the PPI market and came to the view that, whilst the financial crisis and recession have certainly had an effect on providers’ sales, they haven’t altered fundamental competition problems. PPI customers currently have little choice and prices are high because competition is very limited."

"It is notable that even in the depths of the recession following the financial crisis we found that the economic profits of PPI distributors remained significant," Peter Davis added.

The Commission expects its package of remedies will have a "substantial and immediate" effect on competition for new PPI sales as soon as it is implemented. For existing PPI policies, it anticipates the benefits will be felt within two to three years, although some elements, such as PPI's poor reputation with the public, may take longer to resolve.

Comments on the draft decision are invited by 4th June 2010. The Commission will publish its final verdict in July. If it upholds its provisional decision, it will move to introduce the full package of measures as swiftly as possible.