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Loan insurance costing UK too much
People buying Payment Protection Insurance (PPI) are being overcharged by £1.4bn a year, the Competition Commission has found.
It said the overcharging was down to a lack of competition because PPI was sold along with the loans it protected.
The commission suggests that firms may be banned from selling PPI policies to customers when they take out loans.
PPI is insurance for loan repayments if someone loses their income due to ill health or unemployment.
The commission also said it was considering imposing temporary price limits on the policies, until competition brings their prices down.
Lack of competition
Peter Davis, the commission's deputy chairman, said there were serious problems with the sale of PPI polices, with a lack of competition among providers leading to high prices.
Consumers are getting a raw deal
Peter Davis, Competition Commission
"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," he said.
"Distributors don't 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," he added.
The Competition Commission has been investigating PPI after being asked to do so by the Office of Fair Trading.
The OFT had concluded that PPI was often a poor deal because the level of cover was less than customers thought.
It in turn was responding to a "super-complaint" by Citizens Advice which was first lodged in September 2005.
"Protection racket"
The British Bankers Association (BBA) took issue with the Commission's finding that the cost of PPI policies was too high.
A culture in our banks of taking unfair advantage of ill-informed and unconfident borrowers has been exposed
Robert Peston, BBC business editor
Read Robert's comments in full
"I don't necessarily see that we have been overcharging at all," said the BBA's Eric Leenders.
However the sale of PPI polices has been under severe attack in the past three years, with Citizens Advice describing their sale as a "protection racket".
"We very much welcome today's report which confirms what we said, that PPI is over expensive and often unsuitable and that lenders are ripping off, rather than looking after their customers," said Citizens Advice director of policy Teresa Perchard.
The main financial regulator, the Financial Services Authority (FSA), has fined numerous banks, insurance companies and brokers for mis-selling the insurance.
Last year it said many firms selling PPI were failing to treat their customers fairly.
In May the FSA fined the furniture retailer Land of Leather, and its chief executive, £224,000 because staff selling PPI policies had not been properly trained.
Last week the Financial Ombudsman Service reported that it had seen a surge in complaints about the mis-selling of PPI in the first few months of the year, as a result of media and internet campaigns against the policies.
"A culture in our banks of taking unfair advantage of ill-informed and unconfident borrowers has been exposed by the Competition Commission," said the BBC's business editor, Robert Peston.
Solutions
The main problem, according to the commission's analysis, is that people are given no choice of potential insurance policies at the point of sale when they take out a loan, credit card or mortgage.
The Competition Commission's proposed remedies could destroy this market
ABI spokesman
Many people do not know they can shop around and are unable to work out the real price of the policies, which are sometimes bundled into the cost of the loan.
The policies are often complex and opaque and may be bought because the customers think that doing so will improve their chances of being given the loan.
As a result the prices being charged for PPI are inflated and "consumers are getting a raw deal," said Mr Davis.
The Association of British Insurers said the Commission's plans would disastrous for the market for selling PPI.
"We are very concerned that the Competition Commission's proposed remedies could destroy this market, particularly while we are facing a period of economic uncertainty," said a spokesman.
"It would be disastrous to leave many people unprotected to deal with unforeseen financial crisis," he added.
The Commission suggests that advertising and marketing material should be in a standard form to explain PPI properly, to make different polices easily comparable, and to tell customers that they can shop around.
To help people switch to cheaper policies the regulator suggests that they should be renewed annually, with the provision of an annual statement of the policies' costs and a reminder that they can be cancelled.
