 competition_commission_ppi_market investigation notice of possible remedies.pdf ( 87kb)
Summary of main points
- Citizens Advice would like to see two key outcomes of the Competition Commission PPI market inquiry and more consumers taking out insurance to protect them selves against credit risk confident in the knowledge that they will get a good quality product at a reasonable price.
- Citizens Advice supports the proposals in the Competition Commission possible remedies statement to improve the information available to consumers on PPI options. However we are not convinced that these remedies will deal with consumer detriment in PPI markets either quickly or effectively.
- CAB evidence suggests that problems in PPI markets are so ingrained and consumer detriment of such a scale that indirect measures to stimulate competition are unlikely to be wholly effective. Therefore we believe that a more direct approach is likely to be needed.
- Citizens Advice believes that the Competition Commission should consider introducing a price cap on PPI products. However we believe that this should be targeted at the commissions that PPI distributors are currently paying themselves.
- We believe that the Competition Commission should also require distributors to offer a baseline product that sets minimum standards of content and quality in PPI products. This includes setting minimum standards in the areas set out in the proposed remedies statement but going beyond this to set a baseline for all key product features. This would simplify consumer purchasing decisions and make price comparisons more transparent.
- We believe that minimum product standards and a price cap can be sensibly brought together in the form of a stakeholder baseline product that all distributors should be required to offer.
- Citizens Advice is concerned that the proposal to prohibit distributors from selling PPI at the credit point of sale will result in fewer consumers taking out credit protection while doing little to improve the cost and quality of PPI products offered to consumers.
Citizens Advice welcomes this opportunity to respond to the Competition Commission PPI market investigation notice of possible remedies. The CAB service is a network of 432 independent advice centres providing free, confidential and impartial information, advice and advocacy from over 3,000 locations in England, Wales and Northern Ireland. It provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination.
The service aims:
- To provide the advice people need for the problems they face; and
- To improve the policies and practices that affect people’s lives.
In 2007/08 the CAB service dealt with 5.5 million enquiries and this included 1.7 million enquiries relating to debt. Of these around 750,000 related to mortgages, secured loans, unsecured personal loans and credit, store and charge cards; in other words the sort of consumer credit agreements that payment protection insurance policies are associated with. Enquiries that are explicitly about PPI policies are less common with around 5,600 recorded by advisers in 2007/08. Instead Citizens Advice Bureaux tend to find problems with PPI policies as a consequence of helping people deal with consumer debt problems. This is highlighted in cases reported by CABx over the last few months. A small selection of these is shown below by way of example.
A CAB in Kent saw a 36 year old woman who had taken out a secured loan for £85,000 following a phone call from the lender. However when they received the final loan documentation they found that a PPI policy had been added to the loan even though this had not be mentioned at any time in the conversation the woman had with the salesperson. The PPI policy added an extra £21,000 to the loan, increasing the total debt to £106,000.
A CAB in Worcestershire saw an 18 year old woman who was working 26 hours per week with take home pay of £160. The woman had taken out an unsecured loan for £2,000 with an additional £1,285 added to the loan for payment protection insurance. The interest rate on the loan was a shocking 60%. The client told the CAB that the tick boxes in the loan agreement asking the borrower to confirm that they wanted PPI had pre-completed ticks.
Another CAB in Kent saw a 49 year old woman about her debt problems. She had taken out a secured loan of £100,000 and did not realise that PPI insurance had been added. The PPI premium added an additional £25,000 to the loan balance. The increase in the monthly loan repayment due to the £25,000 PPI was contributing to the woman’s financial hardship.
A CAB in Lancashire saw a woman who had been working at the minimum wage for 30-33 hours per week. Last year she had two jobs but one of them had stopped. She was having difficulty making repayment to her bank for credit card and other debts, so the bank suggested a consolidation loan of £19,800 to which they added £6,000 for PPI without explaining the details. The monthly repayments on this loan were £400. Then the bank gave her another credit card which she used to borrow money each month to repay the loan.
Cases like these formed the basis of our evidence report Protection racket and our super-complaint to the Office of Fair Trading in September 2005. Here we raised concerns about the poor value we believed consumers were getting from PPI products. But we were and remain equally concerned about the way that failures in the PPI market may also contribute to many of the debt problems seen by CABx. These cases highlight how payment protection insurance can be a significant part of the debt problems experienced by some CAB clients. Far from giving these borrowers ‘peace of mind’, problems with the cost and quality of products and the way that they were sold seem to have made their debt problems worse rather than better.
Our concerns about PPI are therefore very firmly rooted in the experience of the CAB service in dealing with the problems faced by severely indebted consumers. But this experience also suggests that consumers should perhaps be doing more to protect themselves against the risk of defaulting on their credit agreements by taking out protection products. Concerns about the failures of PPI are matched by concern as to the low level of take up for protection products in key areas such as mortgage and secured loan products. Indeed statistics from the Council of Mortgage Lenders suggest that take up of MPPI policies has fallen to 18 per cent of new mortgages, a worrying statistic given current uncertainty in the housing market and wider economy. It seems a particularly joyless irony that the full failure of PPI is exposed at exactly the time consumers should be thinking hardest about their protection needs with regard to key credit commitments.
We believe that this point is very relevant to consideration by the Competition Commission of any remedies to address the adverse effect of competition and associated consumer detriment stated in the provisional findings report. Citizens Advice has previously stated our belief that this investigation into the PPI market touches on issues of wider public interest such as how to tackle levels of consumer over-indebtedness and the role of the lending industry in doing this. Indeed from our perspective getting lenders to properly regard PPI as a kind of ‘merit good’ protecting both their customers and themselves against problem debt rather than as a cash cow to boost income streams and subsidise headline loans rates would be perhaps the most significant outcome of this investigation.
While we understand that these issues fall outside the direct remit of the Competition Commission, it is possible that different remedies flowing from the market investigation could affect these wider public policy concerns in different ways. Therefore Citizens Advice would ask the Competition Commission to favour a package of remedies that seem most likely to achieve both of the following outcomes.
- Significantly reducing the cost of PPI for borrowers while improving the quality of products.
- Improving the take up of insurance products offering protection against credit risk, particularly for mortgages and secured loans.
Citizens Advice warmly welcomes the provisional findings report of the Competition Commission’s PPI market investigation. We believe that the analysis in the report opens the way for a once and for all clean up of the PPI market. However and perhaps more importantly the remedies flowing from this investigation should force the lending industry to think hard about what they could be doing to reduce the customers’ exposure to credit risks in future. The cases cited above highlight how a ‘bad deal’ from PPI is often linked to poor lending practices in CAB evidence. This supports the point with have raised with the Competition Commission previously, that lasting improvements in PPI are likely to depend as much (if not more) on changing the conduct and attitudes of lenders to PPI products as on changing the shopping habits of consumers. We would ask the Competition Commission to take this point into account in the design of any final remedy package.
Our comments on the proposals in the possible remedies statement are set out below.
Option 1. Standard disclosure of cost to the customer of PPI and credit and requirement to provide a statement of ‘key messages’ on advertising and marketing material
Citizens Advice broadly supports the proposal to provide consumers with better information on the cost of PPI and options for purchasing PPI in product advertising and marketing material. CAB evidence highlights numerous cases where consumers have entered into PPI agreements with very little understanding of the product they were offered, what it will cost them or of the existence of alternative suppliers.
A CAB in Kent saw a 35 year old woman who had taken out two loans for £1,000 and £4,000 respectively. Both loans had PPI policies attached to them that together with interest charged on the insurance premium made up over 22% of the total amount to be repaid by client. The woman had not been told about the interest charge for the insurance and she was not told that she could look for an alternative policy. She did not know what was covered or whether the policy was appropriate for her circumstances. The woman said she was told she had to have the PPI in order for the loan to be granted.
A CAB in Oxfordshire saw a 26 year old woman who went to see her bank because she was overdrawn. The bank offered her a loan of £3,000 which she said was pressed on her. She was not told an interest rate but she had a vague feeling they said something about payment protection but she was not sure. She had the paperwork and on the front cover it said that she had borrowed £3,000 and, in extremely small print, another £1,400 to cover the payment protection. With interest at 22% she had agreed to repay a total of £6,480. She did not work this out.
Another case highlights how borrowers may have little understanding about PPI at the point of sale even where they have some knowledge of credit pricing.
A CAB in Greater Manchester saw a 56 year old man who had visited a bank to apply for a personal loan for £5,000. He had researched the bank’s rates on the internet and established that they offered a typical rate of 7.4% APR. He also found some literature regarding a ‘loan sale’ where the APR rate quoted for a loan of £7,500 was 8.4%. He was interviewed by a customer adviser who persuaded him to take out a loan for £7,500. He was then given a personal loan agreement which he signed. Then he noticed the actual APR was 15.9%. When the client raised the issue of the differing APR’s, he was told ‘You signed the documents’. He was also advised to take out payment protection insurance, which he did, even though he was retired so the policy would have provided little or no benefit for him.
This case highlights both the benefits and limitations of the proposals set out in option one. There are undoubtedly some consumers that do engage in product research and shopping around for credit products, but do not currently do so for PPI. The information requirements proposed in option one should raise transparency with these consumers and make them more likely to question the value of the product the lender is offering.
On the other hand, in the case cited above, the consumer did not get the product he wanted despite his prior research! This highlights the way that consumer information strategies can be very easily undermined by poor sales practices. Indeed the PPI market is perhaps a celebrated example of this problem. Sales of payment protection insurance have been regulated by the Financial Services Authority since 2005 and the FSA has development both conduct of business standards and consumer information standards for PPI. Yet despite this, thematic work by the FSA has repeatedly found evidence of widespread mis-selling. Indeed following the third round of thematic reviews, the FSA concluded in September 2007 that ‘we are extremely disappointed that some firms have still made little progress in improving their sales practices’. This is reflected in recent CAB evidence showing how lenders have continued to mis-sell PPI policies.
A CAB in Berkshire saw a 46 year old woman who lived with her partner. She had been unwell with depression since 1999 and was unable to work and in receipt of income support of £131.80 per week. She had a bank account that was £1,100 overdrawn and on a visit to her bank last year she was offered a £3,000 loan which she accepted. The loan paid off her overdraft, but by January she was into overdraft again. The bank then topped up the loan to £5,000 with the addition of a PPI policy with a premium of £1,480. With interest, the total amount to be paid back was £8,491.80. The woman was unable to pay the £141.53 repayment from her means tested benefit. The bank responded by putting her overdraft limit up to £1,250 so that they could take the next loan payment of £141.
A CAB in Hampshire saw a 53 year old woman who with her husband had been sold a £15,000 loan that had PPI added to it. Her husband was 70 and she had long term health problems and was unemployed. She said that they had not been about any health issues when the policy was sold.
A CAB in Worcestershire saw a 68 year old man in receipt of a pension and disability living allowance. He took out a loan from a bank in September 2007 for £21,400 with an additional £8,146 for payment protection insurance. The total repayable including interest was t £47,000 repayable over 10 years. The loan was used to partly to pay off other debts with the remaining balance used to make repayments to the loan itself. When the money ran out the man was no longer able to afford the repayments.
So while we are broadly supportive of the various remedies that focus on consumer information, the recent history of problems with PPI sales lead us to a profound pessimism that such a strategy will not be by itself successful. Nevertheless, we have the following brief comments on the nature and content of consumer information.
Firstly, the information remedies set out in options one, two and three all seem to suggest disclosure through some sort of notice. Here it is noticeable that in the new insurance conduct of business rules the FSA seem to place more emphasis on real time exchanges between consumers and PPI sales staff in recognition that paper based (or equivalent) information requirements have done little to prevent consumers being sold inappropriate products. So rather than simply providing paper based information, there is a requirement to actually explain the main features of the policy in certain circumstances. We would urge the Competition Commission to consider the dynamic of the sales processes in the cases cited above and to consider the extent to which the information requirements set out in these remedies needs to include explicit reference to oral explanations in real time sales.
We recommend that information about PPI costs under option one should also include a requirement for lenders and intermediaries to disclose both the proportion of the premium that is paid to them as commission and the amount of commission they will receive from the sale of the PPI product. Given the unconscionable level of commissions reported in the provisional findings, greater transparency on commission levels would perhaps encourage consumers to question the product offered by the lender or intermediary and take interest in the information on alternative providers. Put simply, consumers may take more interest in price where they have reason think that the price they are being offered is unfair.
We strongly support the Competition Commission’s proposal to develop a standard comparable cost measure for PPI, but we have no specific preference as to what the measure should be at this time. However any such measure might be most easily understood by the widest range of consumers if it is expressed in clear cash terms rather than through a more technical rate measure such as an APR. Where payment of the PPI premium requires further borrowing (such as is usually the case with single premium policies) the additional costs of this interest should be included in the measure (although perhaps set out separately from the premium price).
Finally we would point out the content of credit advertising will be governed by the European Consumer Credit Directive from 2010. Article Four of this directive sets out information that must be included in advertisements for credit agreements within scope of the agreement. Article Five sets out standard pre-contractual agreement that must be provided to consumers in respect of agreements covered by the directive. As the Directive has been made on a maximum harmonisation basis, the ability to impose additional requirements in credit advertisements might be constrained. This would not seem to affect specific PPI advertising but remedy option one would lose much of its force if the requirements cannot be carried over into credit agreements covered by the Directive.
competition_commission_ppi_market investigation notice of possible remedies.pdf ( 87kb)
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