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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.
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.
