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Lenders have warned they could increase the cost of personal loans after the competition watchdog called for a ban on the sale of payment protection insurance (PPI) at the same time as financial products.
The Competition Commission's proposals follow a 16-month investigation into the £5bn market in PPI, which is sold with credit cards, loans and other credit arrangements and offers a payout if the holder is unable to work as a result of accident or illness, or if they lose their job.
The watchdog said that there was very little competition in the market as most of the 13m policies in existence were sold at the same time as the consumer took out credit. Borrowers often did not realise that they could shop around for cover and many believed buying it increased their chance of getting a loan. Some even said that they had been unaware they were buying the product.
The commission, which publishes its final report in January, said that it was considering making firms wait 14 days after the sale of a loan before they contacted a customer to offer the insurance. It also proposed that providers give consumers a personal quote, clearly setting out the cost of the policy, both on its own and when added to the repayments.
Single premium cover, which is often the most expensive way of buying PPI as it is added to the debt and accrues interest on top of the cost of the cover, could also be banned.
Consumer groups welcomed the proposals, despite warnings that they could result in higher costs. Not only do the lenders stand to lose profits if PPI sales fall, but the commission found evidence that premiums were being used to subsidise loans and keep rates down.
Michelle Slade, from the financial information firm Moneyfacts, said that lenders had already increased margins on personal loans as a result of the credit crunch, and the loss of PPI sales could make matters worse. "This is the product they make their money on, so unfortunately costs are likely to be passed on elsewhere," she said. "We saw a similar thing after the crackdown on credit card default fees - charges elsewhere went up straight away."
Clare Francis of the price comparison website moneysupermarket.com said: "The decoupling of the PPI sale from the loan sale is likely to have one immediate effect - loan rates will rise."
Phil Jones from the consumer group Which? said that he would be "very disappointed if just because the gravy train is being brought to an end consumers are penalised", but that lenders "have a history of sneaky behaviour".
He added that lack of transparency had been one of the main concerns about PPI, and that would at least end if lenders were unable to continue cross-subsidising products.
However, insurers suggested the proposals could leave people exposed to financial difficulty should they fall ill or be made redundant. The Association of British Insurers (ABI) said that between September last year and the same month this year there had been a 69% increase in the number of PPI customers claiming on a policy after losing their job.
"If the commission continues down this path it will kill the PPI market altogether, leaving millions of consumers with no protection at all," said Nick Starling, a director at the ABI.
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