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Lenders have warned they could increase the price of personal loans after the Competition Commission today called for a ban on the sale of controversial payment protection insurance (PPI) alongside credit agreements.
The watchdog wants firms to wait 14 days before contacting a customer to see if they want to buy the insurance, which covers debt repayments if the holder is unable to work due to an accident or illness, or if they lose their job.
However, lenders said the move could result in higher costs for consumers and leave some borrowers with no way to repay their debt if they experience financial difficulties.
The Competition Commission's proposal, which could form part of its final report in January, is designed to make it easier for consumers to shop around for PPI.
The PPI market is worth more than £5bn a year, with 90% of the 13m policies in existence sold to protect consumers with personal loans, credit cards and mortgages.
The cover has been attacked by consumer groups who say policies are expensive and often include exclusions that prevent borrowers from making a successful claim.
In recent months the Financial Services Authority has fined several lenders for mis-selling the cover, including Alliance & Leicester, which received a record £7m fine in September.
Complex products
Even where customers could benefit from PPI they will often pay more if they buy it alongside a loan or credit card. While standalone policies can cost as little as £2.65 for every £100 being covered, some lenders are charging as much as £28.
However, the commission found that many people were unaware they could buy PPI from other providers, while comparing prices was difficult due to the complexity of the product.
It said there was a belief among consumers that buying PPI increased their chance of getting a loan, and in some cases people even claimed they had been unaware they were even buying the product.
Under the proposals, consumers would be allowed to call back to buy PPI 24 hours after signing a credit agreement.
The commission is also proposing a ban on the sale of single premium PPI policies, in which the cost for the entire term of the policy is paid upfront and added to the debt being taken out. It said the structure of the product made it difficult for consumers to switch provider and shop around for better deals.
Other proposals include a requirement for PPI providers to give consumers a personal quote, clearly setting out the cost of the policy, both on its own and when added to the repayments. If this is not given when the original credit agreement is taken out, the firm must give it to the consumer if they make contact, and wait another 14 days before they can sell them a policy.
The commission stopped short of introducing a temporary price cap on the cost of the cover, which it said it was considering earlier this year.
Bad timing
Lenders and insurers said the proposals were bad news for consumers at a time when unemployment is increasing. The Association of British Insurers (ABI) said between September last year and September this year there had been a 69% increase in the number of PPI customers claiming on a policy after losing their job.
"This is devastating news for consumers. By effectively denying [them] PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong," said Nick Starling, a director at the ABI.
"If the commission continues down this path it will kill the PPI market altogether, leaving millions of consumers with no protection at all."
The Finance and Leasing Association, which represents many lenders who sell PPI, said the abolition of single premium cover could result in consumers paying more for loans.
The group's director general, Stephen Sklaroff, said: "The commission's proposals, which will raise the cost of credit, have ignored the prime minister's concerns about rising interest rates.
"We call on the commission, even at this late stage, to reconsider."
However, consumer groups welcomed the news. Which? has been calling for changes to how PPI is sold since the late 1990s. Its chief executive, Peter Vicary-Smith, said the commission's proposals were "a huge victory" for consumers.
"This sounds the death knell for shoddy protection and is a wake up call to the industry to develop useful products that consumers actually need."
- Payment protection insurance
- Consumer affairs
- Borrowing & debt
- Insurance
- Credit cards
- Personal loans
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