CC finds fault with PPI industry

On 5 June 2008, the Competition Commission (CC) published its provisional findings regarding competition in the Payment Protection Insurance (PPI) industry. It found that customers are being overcharged by about £1.4 billion per year, on the basis that the 12 biggest PPI distributors enjoyed £1.4 billion of profits in excess of the cost of capital in 2006. And as the CC indicates, these customers are the most vulnerable and least able to pay.

Competition expert Simon Taylor says, "These findings present a clear statement of intent and a stern warning for the PPI industry. There is much still to play for but the PPI providers will now be on the defensive."

The CC provisionally found that:

• PPI distributors face little competitive constraint from each other and hardly any risk of market entry. They are effectively each monopolists in relation to the sale of PPI to their own credit customers.
• They do not seek to win customers from each other and focus PPI marketing on the point of sale of the credit product.
• There are stand alone providers, but they find it difficult to compete, partly because the sort of customers they attract are those who envisage making a claim. Stand alone providers face competition from the distributors but not the other way around (the market is "asymmetric").
• There is very little switching and, because the products are complex, little comparative information. It takes too long to get information on the PPI product and there are often switching penalties, such as single premium policies.
• There are thus clear barriers to entry and expansion.

A notice of possible remedies has been published to address these and other issues. The remedies seek to kick-start the market and increase transparency. Suggestions include making information available on PPI charges for benchmarking purposes and introducing measures to reduce barriers to switching. The CC also suggests the removal of the point of sale advantage, by imposing a minimum period of time between the credit point of sale and marketing the PPI product. While the market is being revived, the CC could also seek to impose pricing caps (in effect, reductions) to enable prices to be brought "closer" to more competitive levels. The CC has invited comment (by the end of June) on these remedies and the provisional findings.

Simon adds, "There will be real concern that some of the more draconian remedies envisaged could severely undermine the PPI market. Price caps will reduce further the possibility of market entry and hinder market expansion. Removal of the point of sale advantage could result in a dramatic reduction in sales, leaving consumers unprotected. Whatever the outcome, the banking and credit product industry, already rocked by successive OFT investigations, will continue to endure a bumpy ride over PPI."