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The sale of controversial payment protection insurance (PPI) alongside loans and credit cards is to be banned in 2010, the Competition Commission said today.
Under the new rules, lenders will have to wait seven days before they can contact a customer to offer them the insurance, which covers a borrower's repayments should they lose their job or find themselves unable to work as a result of sickness or an accident.
The move, which follows a two-year inquiry into the £4bn a year market, is designed to increase competition by encouraging consumers to shop around for the best deal on the cover.
PPI sales have proved a profitable sideline for loan and credit card companies, with the vast majority of the 12m policies in operation sold alongside loans and other credit agreements.
While standalone policies can cost as little as £2.65 for every £100 being covered, some lenders are charging as much as £28. However, many consumers are unaware they have a choice of policy.
The commission was originally considering forcing companies to wait 14 days before contacting a policy holder, but said it had decided seven days was long enough for consumers to shop around. If they decide they still want to buy the insurance from their lender during that period they are allowed to contact it to buy the policy 24 hours after taking on the associated loan.
The commission is also banning the sale of single premium PPI policies, in which the cost for the entire term of the policy is paid upfront and usually added to the debt being taken out.
These policies have typically been the most expensive and are hard to cancel without losing money, making it difficult for consumers to switch to a better deal.
Another change being introduced is 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. These measures are set to come into force in April 2010, with the ban on single premium policies and immediate sales coming into force in October of the same year.
The commission stopped short of introducing a temporary price cap on the cost of the cover, which it said it was considering last year.
Competition problems
Peter Davis, who chaired the inquiry for the commission, said: "These are significant measures carefully designed to address the serious competition problems that currently exist in this market.
"The 'point-of-sale' advantage has meant that leading providers have faced little competition for PPI and, as a result, have charged persistently high prices.
"Consumers' interests are not best served when the only choice the vast majority have is whether or not to purchase their credit provider's PPI product."
The changes are likely to receive a lukewarm welcome from consumer groups who say policies are expensive and often contain 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.
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