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Companies face little or no competition when selling payment protection insurance (PPI) to their credit customers.

As a result customers appear to be overcharged by over £1.4 billion a year, the Competition Commission (CC) has said in its provisional findings report into the sale of PPI in the UK.

The report finds that the vast majority of the UK's more than 14 million PPI policies are sold at the same time as a consumer takes out a loan or other type of credit.

Many consumers are unaware that they can buy PPI from other providers and rarely shop around to compare prices and policies.

This makes it difficult for other providers to reach these customers and in the absence of such competitive pressure, the distributors-such as banks, mortgage providers and credit card providers-are able to charge higher prices.

Point-of-sale advantage

The CC has also published a wide-ranging list of potential measures to increase competition in the PPI market.

The measures under consideration would provide better information to customers about what they are buying and the price of the PPI relative to the price of loans, improve their ability to compare products, and make it easier for them to switch between providers-including a possible prohibition on selling single-premium policies.

The CC is considering tackling the 'point-of-sale' advantage enjoyed by sellers of credit and is consulting on whether it is necessary and appropriate to ban the sale of PPI at the same time as the associated credit product, in order to improve competition.

Other measures include the possible introduction of a price cap as a temporary measure to reduce prices, and additional proposals to enhance the ability of suppliers to compete more effectively with the company selling PPI with a loan or other credit product.

Peter Davis, inquiry chairman and CC deputy chairman, said that the CC had found serious problems with the PPI market and warned that customers are paying for the lack of competition.

The way PPI is sold as an 'add-on' to a loan or other credit product means distributors escape the pressure they should face from competing suppliers.

Actual cost not easy to work out 

Distributors do not appear to compete much with each other on either price or quality of PPI; neither do they appear to do much direct advertising of PPI to win customers from each other.

Most consumers understandably focus on the loan or credit and its APR and tend to make a snap decision when the PPI product is then offered to them, rather than looking at the true cost of the credit and PPI together, or at the range of PPI products available.

In fact, many customers simply are not aware that they can get PPI elsewhere, potentially for less and equally others believe that buying PPI from the provider increases their chance of getting a loan.

The actual cost of PPI relative to credit is not easy for consumers to work out. There would clearly be benefits to searching around for many customers, in terms of lower prices, but the difficulty of comparing products makes it very hard work.

As a result, few consumers do actually shop around for PPI or subsequently switch between providers. In turn, that means credit providers aren't under much competitive pressure and so consumers are getting a raw deal.

“We're now consulting on a range of possible measures to ensure PPI customers get a better deal by emphasizing their right to choose, by improving their ability to compare prices and products and by making sure that they're making a considered and informed decision when they take out the cover,” Davis added.

No strong evidence of cross-subsidies 

The CC is also looking at measures which will improve competition between providers, so that consumers who do compare products, or seek to switch, find better offers to choose from.

The Commission wants to see which measures will be most effective and practical in addressing these problems.

Davis explained that the inquiry did not see strong evidence of cross-subsidies between PPI and mortgages or credit cards, but said the evidence did suggest that, in the case of personal loans, high prices for PPI are subsidising the interest rates being offered by some, but not necessarily all, providers.

“When considering what action to take, we'll have to consider to what extent cross-subsidy is an important customer benefit and weigh that against the obvious disadvantages of high PPI prices and lack of choice that the evidence strongly suggests consumers are suffering from at the moment,” he said.

The inquiry looked at the issue of miss-selling during this inquiry. The industry regulator, the Financial Services Authority (FSA), takes the lead on regulating sales practices, and the Financial Services Ombudsman (FOS) deals with consumer disputes.

The CC’s focus has been on examining whether there is effective competition in the market as a whole.

“In taking action to improve competition between companies selling PPI we shall be enhancing the incentives for companies not only to compete on price but to compete on non-price factors such as quality and service,” according to Davis.

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