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Payment protection insurance (PPI)

Last updated 03/12/2008: any recent updates in this colour.

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A guide to Payment Protection Insurance 

In June 2007 the CML, together with the Association of British Insurers, British Bankers Association, Finance and Leasing Association and Association of Credit Insurers, published a leaflet entitled "A guide to Payment Protection Insurance". The leaflet was updated in February 2008 to reflect a change brought into effect by the Financial Services Authority's new ICOBs rules: under the heading "How can I cancel PPI?" the cooling-off period has been extended from 14 to 30 days. You can find a link to the February 2008 version of the leaflet at the bottom of this page. 

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Background to the OFT and CC investigations into the PPI market

Payment protection insurance (PPI) including mortgage payment protection insurance (MPPI) for mortgages has been the subject of detailed investigations by both the Office of Fair Trading (OFT) and the Financial Services Authority (FSA).

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Competition Commission Investigation into PPI

The OFT announced on 7 February 2007 that it intended to refer the entire PPI market, including MPPI (but excluding insurance sold with store cards), to the Competition Commission (CC) for inquiry. 

More information is available on the CC's PPI market inquiry page. The statutory deadline for the Inquiry is 6 February 2009.

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Issues statement

The Competition Commission published its issues statement on 12 April 2007. This document identified the specific questions and areas the CC believed were relevant in deciding whether any feature of the market(s) for PPI products restricts, distorts or prevents competition. 

We submitted our response to the statement on 11 May 2007. In it we emphasised the aspects of MPPI which differentiate it from the wider PPI market.  

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 Publication of the Commission's "emerging thinking" document

The Commission published its "emerging thinking" document on 6 November 2007, together with a number of accompanying papers. all of which can be found on the Commission's Inquiry website. There were relatively few direct references to mortgage PPI, and these are mainly restricted to factual comments or summaries of the information gathered by the Commission.

On 4 June 2008 the CC published its provisional findings relating to -

  • short-term income protection (short-term IP)
  • the provision of credit card PPI (CCPPI)
  • personal loan PPI (PLPPI)
  • second-mortgage PPI (SMPPI)
  • mortgage PPI (MPPI) 

It concluded that companies face little or no competition when selling PPI and, as a result, customers appear to be overcharged. The report found 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.

The CC 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.

Views on the provisional findings report and notice of remedies were invited by 30 June 2008.

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Publication of provisional findings on retail PPI

At the time of the June 2008 publication (see above) the CC considered, on the basis of the evidence available to it, that retail PPI shared some of the characteristics of CCPPI and PLPPI. It therefore decided to continue work to determine its provision view on retail PPI. Its provisional findings were published on 10 October 2008. By "retail PPI" we understand the CC to mean PPI which is sold by retailers, for example in stores, or in connection with catalogue sales. This document is therefore of lesser interest to members, since it was the June 2008 document which related to SMPPI and MPPI.  

The provisional findings on retail PPI find that, as with other types of PPI policies -

  • retail PPI is highly profitable for distributors
  • there is little competition between providers on price and other factors
  • there is limited ability for customers to search for alternatives or switch products
  • there is a considerable point-of-sale advantage for the providers. 

Publication of a further consultation on analysis conducted to aid decision-making on remedies for the PPI market investigation

On 14 October 2008 the CC published a further consultation designed to aid its final decisions on remedies in relation to the PPI Inquiry. Responses to the consultation, which sets out the CC's new technical analysis, are invited by 4pm on Tuesday 28 October.   

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Background

The OFT's decision to refer the market followed a comprehensive market study into PPI to which which the CML submitted a detailed response arguing that the OFT should defer an MPPI referral to the CC while FSA and market solutions were being implemented. 

The CML response:

  • demonstrated that there were areas of the market study which we believed did not apply to MPPI, in response to each concern the OFT raised;
  • acknowledged there were aspects of the MPPI sector that need addressing, such as consumer understanding and switching;  
  • explained that the CML and other organisations were working on self-correcting measures, namely a consumer guide (this has now been published - see below for attachment) with the ABI and a review of the MPPI baseline specification on continuous cover;
  • suggested the CML was open to other measures such as a task force chaired by the OFT (along the lines of the recent positive experience of the Payment Systems Task Force); and
  • argued that a CC inquiry for the MPPI sector was not a proportionate response at this time, given (a) the findings related to the MPPI sector, (b) other FSA activity, and (c) the self correcting measures that should be regarded by the OFT as undertakings in lieu.

We also published a News & Views article shortly after the OFT report was published.

Despite the responses from the CML and other trade associations, the OFT determined that the MPPI market was not sufficiently different to warrant a exclusion from the scope of the referral. We issued a press release outlining our disappointment with this decision.

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FSA thematic reviews

The FSA published its report on the second stage of its thematic review into PPI in October 2006. In the first phase of its review, the FSA concluded that regular premium MPPI sold with prime mortgages did not pose a risk to FSA objectives, and it was therefore excluded from the scope of the second phase.  MPPI sold with sub-prime mortgages was, however, included. The report on the second phase identified continuing problems with some aspects of the PPI market. However, the FSA acknowledged efforts by trade associations including the CML to achieve improvements. These efforts included the provision of guidance on improved sales procedures, training, and work with the Association of British Insurers to provide a consumer leaflet. 

The FSA announced the results of phase 3 of the review on 26 September 2007. This confirmed the FSA's previous findings that sales of regular premium prime mortgage PPI, on an advised basis, were most likely to meet the FSA's requirements. We issued a press release in response.

In the wider PPI market, the FSA's report showed improvements in making it clear to customers that PPI was optional and offering cancellation refunds on virtually all single premium PPI policies. However, little or no progress had been made in other areas including giving customers clear information about the product and what it would cost. Full details can be found in the FSA's report.

A further press release and update were published on 30 September 2008 (more details available in the member-only part of this page). 

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FSA/industry agreement of refunds of single premiums 

On 28 March 2007 the FSA published a press release drawing attention to an agreement reached with PPI providers whose products are bought with a single premium. The FSA had been concerned that some of these products had "nil refund" terms which prevented consumers from receiving a partial refund if they cancelled the policy for any reason.  

Under the terms of the agreement, firms should:

  • not include nil refund terms in contracts with new customers;
  • not apply nil refund terms in contracts with existing customers;
  • contact existing customers if their contracts contain nil refund terms to inform them how refunds will be dealt with in practice; and
  • include in new policies examples or a table to illustrate how refunds will be calculated to improve transparency.
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FSA factsheet for firms selling payment protection insurance

The FSA has published a new factsheet aimed at those who sell payment protection insurance - this is available on the FSA's website.

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Policy update report

An update for members on recent policy activities