226/05    8 December 2005

The OFT is to carry out a market study to look in depth at the PPI sector. The market study, which is the outcome of the OFT's consideration of a super-complaint from Citizens Advice (CitA), will be launched early in 2006.

Download Response to the super-complaint on payment protection insurance made by Citizens Advice (pdf 122 kb).

PPI is applied to a number of credit products including mortgages, loans, credit and store cards, and protects a borrower's ability to pay the loan in case of accident, sickness or unemployment. Around 6.5 to 7.5 million policies are taken out each year and it was estimated in 2003 that £5.4 billion in premiums were generated.

The OFT has decided to carry out a market study because a number of factors, notably, the size of the sector, the complexity of the product coupled with limited understanding on the part of the customer, and the way in which the product is sold (as a secondary purchase to the credit product) point to a potentially high risk of consumer detriment.

The OFT has identified a number of issues which point to the sector not working well for consumers and which indicate the need for a more detailed examination:

• consumers face difficulties in respect of (a) gaining information they need about alternative suppliers and (b) the technical nature and/or lack of transparency of the information available to them
• there are high costs or other barriers to entry for stand-alone PPI providers
• there is a wide degree of variation in pricing in the sector 
• gross profit margins appear high - although there is a lack of information on profitability, an indication of high profitability is provided by claims ratios – PPI claims ratios are estimated to be 15 – 20 per cent, which is low compared to other general insurance products: for example, claims ratios for motor insurance are 74 per cent and household insurance are 55.2 per cent.

John Fingleton, OFT Chief Executive, said:

'PPI is a complex product, often bought almost as an afterthought. Borrowers may shop around for credit, but the complex nature of PPI and a lack of choice mean that they are less likely to shop around for PPI. There is a high potential for consumer detriment – our study will look at whether consumers are getting a good deal or not.'

The precise timing and scope of the market study will be decided in early 2006 after the Competition Commission has reported on store cards and associated PPI. However, the OFT will look in more depth at the issues highlighted above as well as other issues raised by CitA in the super-complaint. The findings and outcomes from the CC's work, and also the Financial Services Authority's thematic work on PPI, will play a key role in influencing the direction of OFT's work. The market study gives us the opportunity to look more carefully at these and assess the impact they might have on the sector. The CC is due to report in January 2006. The FSA reported in November 2005.

The FSA regulates PPI, although the OFT does license businesses offering credit or acting as credit brokers. The study will also consider the scope for a more joined-up strategy for regulating PPI and consider whether guidance can raise standards and, if so, where that guidance should be targeted.

In considering the super-complaint the OFT consulted with lenders, insurers and their trade associations and drew on its knowledge of the PPI market from its work on store cards and credit regulation.

NOTES

1. The Enterprise Act 2002 makes provision for designated consumer bodies to make super-complaints. A super-complaint, as defined by section 11(1) of the Act, is a complaint submitted by a designated consumer body that 'any feature, or combination of features, of a market in the UK for goods and services is or appears to be significantly harming the interests of consumers'. Citizens Advice is a designated consumer body. Within 90 days after the day on which a super-complaint is received the OFT must say publicly how it proposes to deal with it. Further information concerning the PPI super-complaint is available from the Super-complaints section of this site.

2. On 13 September 2005 CitA submitted a super-complaint to the OFT about PPI. It was based upon the CitA report Protection racket: CAB evidence on the cost and effectiveness of payment protection insurance. CitA stated that the evidence presented in its report suggested that features of the PPI market seriously harmed the interests of consumers. Four main areas of concern were highlighted. They are:

• consumers pay an excessively high price for PPI
• the protection consumers buy is partial, with many policies unreasonably excluding common causes of credit default
• consumers are frequently mis-sold PPI, with evidence of high pressure and unfair sales tactics
• the administration of PPI claims can be slow and unfair, and can leave consumers facing additional charges or serious debt enforcement action.

3. The main possible outcomes of an OFT market study are:

• giving the market a clean bill of health
• publishing information to help consumers
• encouraging firms to take voluntary action
• encouraging a consumer code of practice
• making recommendations to the Government or sector regulators
• investigation and enforcement action against companies suspected of breaching consumer law or competition law
• a market investigation reference to the Competition Commission.