Watchdog ruling could hit loan costs

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Watchdog ruling could hit loan costs.

The forthcoming Competition Commission ruling over payment protection insurance could, in effect, raise the cost of personal loans.
PPI has proved a controversial and unpopular product among consumer groups but for some banks it has helped to reduce the rates charged.

PPI is sold alongside unsecured personal loans, credit cards and mortgages to cover repayments if the borrower falls ill or loses their job. About 6.5m policies are taken out each year but premiums are high and in many cases people never make a claim.
In recent years personal loan rates have been forced down as consumers have shopped around.
Banks have, in effect, subsidised the costs of personal loans by cross-selling the same consumers payment protection insurance, which carries a better profit margin.
However, the forthcoming Competition Commission ruling could mean banks have to be more transparent about the sale of the product and may even have to sell it separately from loans.
Banking industry insiders suggest this could push the price of loans up at a time when it is becoming tougher for consumers to get other forms of cheap finance such as mortgages.
Doug Taylor, personal finance campaigner for Which?, the consumer group, said on Friday that just 20 per cent of the income paid into PPI policies was ever paid out in claims. This compared with 80 per cent for car insurance and 50 per cent for household insurance.
“We’re critical of PPI as a product,” he said. “We think it needs more transparency but that alone will not solve the issue. Consumers need to consider whether they are already covered under their employers’ sick pay scheme, for example, before taking it out.”
The debate has a wide social resonance because of concerns that poor people who take out expensive PPI policies are cross-subsidising banks’ offerings of cheap loans to the rich.
Furthermore, the cost of personal loans has already risen in the past year as banks have become more wary about creditworthiness of customers.
Moneyfacts, the information provider, says the annual percentage rate charged for a £5,000 loan over three years has risen from 7.1 per cent last May to 8.5 per cent now. Some banks believe if the commission ruling is tough the rates on personal loans could rise to as much as 10 per cent.

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Banks accused over loan cover

British banks accused over loan cover
By Michael Peel and Jane Croft FT Online
Published: May 23 2008 23:30 | Last updated: May 23 2008 23:30

Britain’s biggest banks are braced for a stinging competition watchdog ruling that will accuse them of large-scale profiteering on insurance products and could lead them to further raise the soaring price of personal credit.

A Competition Commission probe will soon unveil possible sanctions against the banks over up to £1.5bn of allegedly excess profits made from the sale of sickness and unemployment insurance to cover customers against their failure to pay off personal loans, lawyers and industry insiders said on Friday.

Bankers said action by the commission to restrict or remove their ability to sell so-called payment protection insurance would be likely to lead them to seek to recoup lost revenue by raising charges in other areas, not least by raising loan interests rates.

One banker said: “Personal loan rates have been uneconomic for a while. Rates are likely to go up if PPI is sold separately.”

Bankers expect the commission to argue in its provisional investigation findings – due to be published early next month – that PPI is uncompetitive because customers typically buy it only from the bank where they took out the loan.

Despite industry lobbying, the commission will stick close to its provisional conclusion this year that banks selling the insurance are earning as much as £1.5bn a year above a reasonable rate of return by selling to buyers who are in effect a captive market.

The market for PPI – which covers loan-holders if they become ill or lose their jobs – is worth about £5.5bn a year. The Office of Fair Trading said last year that banks were loading cheap loans with expensive insurance policies.

One competition lawyer who acts for a bank said the commission had concluded that banks were in effect “getting people through the door, quoting them a very low price [for a loan] then selling them something else”.
PPI has come under the scrutiny of the Financial Service Authority, which has fined several companies – including HFC bank, an HSBC subsidiary – for breaking selling rules. Sanctions the commission could impose include a ban on banks selling PPI to loan customers, a price cap, or measures to increase transparency.

The commission declined to comment.

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Re: Watchdog ruling could hit loan costs

A lot of the problem is down to the APR disclosure rules, which allow lenders to quote an APR based on a loan without insurance - and to never refer to an APR for a loan with insurance.

APRs only have to include non-optional insurance. And most PPI is optional (although some would claim that with some of the dodgier lenders, the optionality was more theoretical than actual).

A simple change of the APR rules to require APRs to always be quoted with, and without, insurance, would greatly aid comparability between different lenders without being onerous on the lenders. IMHO, it's a shame that nobody seems to be pressing for this specific measure.