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Consumers will benefit from PPI reforms, says Competition Commission

Consumers applying for a loan or credit will soon not be able to buy payment protection insurance (PPI) at the same time, the Competition Commission confirmed this week.

PPI covers payments due on credit products if the borrower cannot afford to pay because of an accident, sickness, unemployment or death.

The Competition Commission's "point of sale" ban will prohibit banks, building societies, mortgage and credit card companies from offering this type of insurance for seven days after a credit sale. PPI will only be able to be sold during this period if the customer contacts the provider directly after 24 hours by telephone or online.

The ban is part of package of radical reforms first proposed by the Commission in January 2009 to tackle competition failures in the PPI market.

No timetable for implementation has yet been announced. It was originally planned that the measures would be in place by October 2010, but this was delayed by an appeal by Barclays Bank and others to the Competition Appeal Tribunal claiming the remedies were disproportionate and failed to take into account the inconvenience to customers that a point of sale ban would bring.

In October 2009, the Tribunal upheld the Commission's conclusion that there was a significant lack of competition in the PPI market, but remitted the remedy package back to the Commission to consider, among other things, the loss of convenience issue.

In its final report, published on 14th October 2010, the Commission has confirmed its earlier, provisional conclusion that interested parties had overstated the potential loss of convenience, even before taking into account the benefits the remedies might bring in terms of increased competition and lower prices.

It has therefore decided to press ahead with its full package of remedies, which also includes a ban on single-premium policies, personalised PPI quotes for all customers, annual reviews and other measures to make it easier for consumers to compare products and prices.

Announcing the decision, Peter Davis, Competition Commission Deputy Chairman, said the Commission had come to a clear view that, overall, customers would benefit significantly from the measures.

"In particular, these reforms will mean that PPI providers will, in future, face real competition where there is currently little. And, in consequence, the prices consumers currently pay for PPI will fall significantly," he said.

"We know that the major providers have been planning for a time when the prohibition is in force," Davis added, "and in our judgment they will look to continue selling PPI in the future - but thanks to our measures it will generally be as providers of standalone products, rather than ones tacked on to the credit product, which will contribute to greater competition."

The Competition Commission believes that the entry of the main players into the standalone market will be a key development.

"For customers this would mean that suppliers which have been providing most PPI policies will now be making standalone offerings available, increasing choice and increasing the number of household names offering them standalone policies," the final report states.

"This gave us added confidence that, with the remedy package in place, there would be competition between PPI providers"

Excluded from the point of sale ban, however, will be retail PPI, which covers repayments on goods bought via catalogues.

Although the Commission found a lack of competition in the retail PPI market, it concluded that many retail PPI customers would be unlikely to shop around for cover, given the relatively small sums typically involved. Instead, it will introduce measures to ensure clearer information on the cost of cover and the "unbundling" of PPI from merchandise cover, so that PPI would have to be offered separately.

The Commission expects its remedy package will have "a substantial and immediate effect" on competition for new PPI sales as soon as all its elements are introduced, and a substantial effect on existing PPI within two or three years, although it may take longer for the market's reputation to recover.

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