PPI - Consumers overcharged by £1.4 billion

In a new report into Payment Protection Insurance (PPI) the Competition Commission has found that consumers are being overcharged to the tune of £1.4 billion a year. It added that the overcharging was due to a lack of competition, given PPI has invariably been sold alongside the loans it protected.

Many consumers are unaware they can buy PPI from other providers and rarely shop around to compare prices and policies. This makes it difficult for other providers to reach these customers and in the absence of such competitive pressure, the distributors - such as banks, mortgage providers and credit card providers - are able to charge higher prices.

In response the CC has published a wide-ranging list of potential measures to increase competition in the PPI market. The measures under consideration would provide better information to customers about what they are buying and the price of the PPI relative to the price of loans, improve their ability to compare products, and make it easier for them to switch between providers - including a possible prohibition on selling single-premium policies.

It is considering tackling the point-of-sale advantage enjoyed by sellers of credit and is consulting on whether it is necessary and appropriate to ban the sale of PPI at the same time as the associated credit product, in order to improve competition.

Other measures include the possible introduction of a price cap as a temporary measure to reduce prices, and additional proposals to enhance the ability of suppliers to compete more effectively with the company selling PPI with a loan or other credit product.

Inquiry Chairman and CC Deputy Chairman, Peter Davis, said: "We've found serious problems with the PPI market and customers are paying for the lack of competition.

"The way PPI is sold as an add-on to a loan or other credit product means distributors escape the pressure they should face from competing suppliers. Distributors don't appear to compete much with each other on either price or quality of PPI; neither do they appear to do much direct advertising of PPI to win customers from each other."

Most consumers understandably focus on the loan or credit and its APR and tend to make a snap decision when the PPI product is then offered to them, rather than looking at the true cost of the credit and PPI together, or at the range of PPI products available. In fact, many customers simply aren't aware that they can get PPI elsewhere, potentially for less and equally others believe that buying PPI from the provider increases their chance of getting a loan.

The actual cost of PPI relative to credit is not easy for consumers to work out. There would clearly be benefits to searching around for many customers, in terms of lower prices, but the difficulty of comparing products makes it very hard work. As a result, few consumers do actually shop around for PPI or subsequently switch between providers. In turn, that means credit providers aren't under much competitive pressure and so consumers are getting a raw deal.

The Citizens Advice Bureau said: "The Financial Services Authority (FSA) has been taking positive action to clamp down on mis-selling and that is very welcome, but we now need to see tough action from the Competition Commission to end profiteering and bring down the price of payment protection insurance. Lenders have procrastinated for far too long and they need to start playing fair without any further delay."

Banking industry trade body, The British Bankers' Association (BBA), meanwhile took a more cautious line - BBA chief executive, Angela Knight commenting: "The report and discussion document provide some useful food for thought but if some of the recommendations are adopted it could leave customers exposed just as economic conditions are worsening.

"The industry has moved on since the Competition Commission research has been carried out. Customers are better able to shop around and make comparisons, there is more choice around and customers are provided with a separate document showing the key facts of the policy before they take it out.

"There are some issues that concern us and we shall respond to the discussion document explaining what those concerns are. It's important that customers don't end up finding themselves worse off as a result of unintended consequences."