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Over the course of the past few months, there have been great concerns over the practices and methods used in connection with the sale of Payment Protection Insurance (PPI) and Mortgage Payment Protection Insurance (MPPI) and we have reported on many of these issues on a regular basis in our news section.
Payment Protection Insurance is usually taken out, or sold alongside a personal loan or a credit card application and is designed to meet the regular monthly loan or card repayments, in the event of the policyholder becoming unemployed, or suffering from an accident or sickness. Mortgage Payment Protection Insurance is exactly the same as PPI, but designed specifically for use with a mortgage loan and the associated insurances.
Both PPI and MPPI can offer essential benefits and peace of mind to borrowers with loans and mortgages, particularly in these uncertain economic times, when unemployment and redundancy is becoming a real threat for many employees, as many companies continue to cut their staff numbers in order to reduce costs.
But there have been concerns from regulators regarding the sales practices adopted by many loan companies automatically selling PPI policies at the same time as they arrange a new personal loan for a customer.
Over the past year, the Financial Ombudsman Service (FOS) has received more complaints from consumers regarding PPI and MPPI policies, than any other area of business. These range from not being eligible for the cover which was taken out, to not realising that they had actually been sold a policy in the first place.
The other major concern was that, due to the fact that PPI is often sold to the customer at exactly the same time as the loan, many people think that it is a compulsory policy, which must be taken out with the loan provider. As a result of this, consumers are not given the option to shop around for cover from a range of providers, or have suitable time to think about the policy they are being sold.
Due to these concerns, the Competition Commission (CC) has conducted an investigation into the sale of PPI and MPPI policies in connection with the Financial services Authority (FSA) and the Office of Fair Trading (OFT) and has now proposed a number of measures which should increase the level of competition in the PPI market place, thereby reducing the cost of cover for consumers and in turn reduce the level of new complaints being made about the products.
The new proposals are as follows:
* A lender will not be allowed to sell any type of PPI policy at the same time as, or within 14 days of arranging a new loan for a customer. This will allow the consumer to shop around for a quote from different providers and consider the cover they require.
* The loan provider must also provide the customer with a “personal PPI quote”, which highlights the costs and benefits of the plan both individually and when added to the loan.
* The CC has also proposed a ban on the sale of single premium PPI policies, claiming that this does not give the customer sufficient ability to change policy providers part way through their loan repayment schedule.
* All providers of PPI policies must show certain information in their advertisements, including the cost of cover per £100 of benefit and a statement that the cover is optional and also available from other providers.
* Loan and credit companies should advertise PLPPI (personal loan cover) and SMPPI (second charge mortgage, or secured loan cover) in with their adverts for their main product.
* PPI companies should provide details of their plans to the FSA, who will use the information gathered to generate a comparison table on its website.
* PPI companies should also produce a statement for customers every year, in order to help them review the cover they already hold and if they should change to a new provider.
These are, of course, only proposals at the moment and whilst initially they may seem like a good idea, offering loan customers more protection, clearer information and a wider choice of provider for their cover, opinions within the industry vary greatly and those passing comments all seem to have valid points to make.
The Association of British Insurers (ABI) has described the ban on selling PPI at the same time as a new loan as “devastating” for borrowers. Due to the fact that an applicant for a loan will have to wait at least two weeks before applying for PPI cover will mean that a large percentage of individuals are likely to not bother with this cover at all, effectively leaving themselves unprotected.
A spokesman for the ABI said “This is devastating news for consumers. By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got it completely wrong. Unemployment claims on PPI policies have grown by 69 per cent in the last twelve months, showing just how valuable this cover is proving to be.”
The Finance and Leasing Association (FLA), the trade body which represents a large number of personal loan companies who already sell PPI, agrees with the ABI and has urged the Competition Commission to reconsider its proposals, as these moves are likely to leave a high percentage of borrowers unprotected and also have the effect of raising the cost of a personal loan.
However, Paymentshield, the independent provider of PPI and MPPI, has welcomed the news, claiming that the proposals will open up the PPI market to wider competition and enable borrowers to obtain cover at a much cheaper cost than they might have done by taking the cover directly with their loan provider.
Shane Craig of Paymentshield said “The major obstruction to consumers getting a fair deal on payment protection insurance has finally been blasted out of the way, a decision that should have been made a long time before now but one that is very, very welcome.
Lenders’ ability to sell their own PPI at the same time as a loan has been one of the single most unfair financial practices of recent years and has cost consumers billions of pounds.” A recent survey conducted by Paymentshield has revealed that a customer who took a PPI plan with them, rather than with the loan provider has on average, saved around £2,700 over the term of the loan, which just goes to show how much profit loan companies are making on their own PPI policies.
One major worry is that by not being allowed to sell PPI at the same time as a personal loan, lenders will lose out on PPI sales, along with the large profits which go hand in hand with the policies. This has raised concerns that to compensate for this loss, loan companies will be forced to increase the rates and charges they apply to their products, thereby making the basic loan more expensive for the consumer.
A spokesman for the website Fool.co.uk said “Payment protection Insurance has not only been the icing on the cake but the cake itself for loan providers. The difference between taking out a loan with insurance and one without can mean the difference between borrowing money at 17.8 per cent and 7.9 per cent. So borrowers need to be alert to a possible backlash from loan providers following the Competition Commission’s move to ban PPI distributors from flogging the insurance at the same time as selling the underlying loan.”
The CC seems to have stirred up a hornet’s nest by making these proposals and as we can see from the reaction within the loan industry, many groups will be trying to get them to change their minds, or at least alter the proposals. So far this is at initial proposal stage, the final report is due to be published in January next year and it will be interesting to see if the CC is likely to bow to industry pressure, or whether they stick to their original proposals. We will let you know as events unfold.
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