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Watchdog reveals payment protection profits
Insurance policies designed to protect consumers against a loss of income are so profitable that the lenders who sell them can earn revenue of £1,200 on a policy that can cost only £20 to sell, a report by competition authorities revealed yesterday.
The Competition Commission is investigating payment protection insurance (PPI) amid claims that it is expensive, unnecessary and rarely pays out. Lenders typically sell PPI alongside credit cards, personal loans and mortgages. The report said that the average cost of selling a policy, including indirect costs such as branch network overheads, was likely to be between £20 and £80 - yet lenders earn a massive premium on the products. The investigation found that the total revenue from PPI in 2006 reached an estimated £2.4billion, while profits reached £1.4billion.
Yesterday's working paper concluded that PPI is highly profitable and offers a low-risk income for providers. It is also lucrative for the salesmen. According to the report, commission rates on PPI sold with loans and credit cards are between 50 and 80 per cent.
The Commission said that the personal loans industry has been almost entirely propped up by PPI sales since 2006, when loans became a loss-making activity for banks. However, it said that the credit card and mortgage markets had been less reliant on income from PPI over recent years.
The report said: “The personal loans business has suffered from declining profits in recent years, to the point where in 2006 it appears to have been loss-making before taking into account income from PPI. With PPI included, the sector appeared to have been marginally profitable. This appears to be a recent phenomenon: the evidence suggests that prior to 2005, the personal loans sector was profitable, even without PPI income.”
The Commission is not due to make a final ruling until the summer, but yesterday's figures will add weight to claims from consumer groups that the policies are an unjustifiable expense. Which?, the consumer group, has criticised the policies for being useless and costly. On a £10,000 loan over five years, a borrower with Britannia Building Society would pay almost half the total loan amount in PPI, at £4,189.80,
The sale of PPI was referred to the Competition Commission after a two-year investigation by the Office of Fair Trading. If the Commission finds that the price of the policies is unjustifiably high, it could stop some lenders selling the policies altogether.
The figures come two weeks after the Financial Services Authority fined HFC Bank a record £1.085million for failing to give PPI customers suitable advice. The FSA is conducting its own investigation into whether the sale of PPI conforms with its rules on treating customers fairly.
Simon Burgess, managing director of British Insurance, an independent PPI provider, said: “I am very impressed by these figures. The Commission is under enormous pressure from banks, who want to continue to rip off their customers.”
The Commission is considering the implications of its findings. It said that the cost of PPI could not be justified on the ground that it reduced the potential losses to banks through bad debt. While several providers said that PPI acted as a safeguard against impairment losses, another significant party said that, on average, customers who took out PPI incurred higher bad debts than those that did not.
Times Online
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Insurance policies designed to protect consumers against a loss of income are so profitable that the lenders who sell them can earn revenue of £1,200 on a policy that can cost only £20 to sell, a report by competition authorities revealed yesterday.
The Competition Commission is investigating payment protection insurance (PPI) amid claims that it is expensive, unnecessary and rarely pays out. Lenders typically sell PPI alongside credit cards, personal loans and mortgages. The report said that the average cost of selling a policy, including indirect costs such as branch network overheads, was likely to be between £20 and £80 - yet lenders earn a massive premium on the products. The investigation found that the total revenue from PPI in 2006 reached an estimated £2.4billion, while profits reached £1.4billion.
Yesterday's working paper concluded that PPI is highly profitable and offers a low-risk income for providers. It is also lucrative for the salesmen. According to the report, commission rates on PPI sold with loans and credit cards are between 50 and 80 per cent.
The Commission said that the personal loans industry has been almost entirely propped up by PPI sales since 2006, when loans became a loss-making activity for banks. However, it said that the credit card and mortgage markets had been less reliant on income from PPI over recent years.
The report said: “The personal loans business has suffered from declining profits in recent years, to the point where in 2006 it appears to have been loss-making before taking into account income from PPI. With PPI included, the sector appeared to have been marginally profitable. This appears to be a recent phenomenon: the evidence suggests that prior to 2005, the personal loans sector was profitable, even without PPI income.”
The Commission is not due to make a final ruling until the summer, but yesterday's figures will add weight to claims from consumer groups that the policies are an unjustifiable expense. Which?, the consumer group, has criticised the policies for being useless and costly. On a £10,000 loan over five years, a borrower with Britannia Building Society would pay almost half the total loan amount in PPI, at £4,189.80,
The sale of PPI was referred to the Competition Commission after a two-year investigation by the Office of Fair Trading. If the Commission finds that the price of the policies is unjustifiably high, it could stop some lenders selling the policies altogether.
The figures come two weeks after the Financial Services Authority fined HFC Bank a record £1.085million for failing to give PPI customers suitable advice. The FSA is conducting its own investigation into whether the sale of PPI conforms with its rules on treating customers fairly.
Simon Burgess, managing director of British Insurance, an independent PPI provider, said: “I am very impressed by these figures. The Commission is under enormous pressure from banks, who want to continue to rip off their customers.”
The Commission is considering the implications of its findings. It said that the cost of PPI could not be justified on the ground that it reduced the potential losses to banks through bad debt. While several providers said that PPI acted as a safeguard against impairment losses, another significant party said that, on average, customers who took out PPI incurred higher bad debts than those that did not.
Times Online
Related Links
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