UK: Competition Commission publishes final report on store cards

On Wednesday the Competition Commission (CC) published its final report on store cards and the sale of related PPI.

The Commission confirmed its provisional conclusions reached in September 2005 that there is an adverse effect on competition in connection with the supply of consumer credit through store cards and associated insurance in the UK.

The CC found that there is a combination of features which prevent, restrict or distort competition in that market and has suggested remedies to tackle these concerns. The Commissions findings can be divided into two categories, those that deal with store card credit and those that deal with insurance services.

The concerns over PPI highlighted in the report overlap with those identified in the FSA's thematic work on PPI published in November 2005.

The findings and outcomes from both the CC inquiry and the FSA work will play a key role in influencing the direction of the Office of Fair Trading (OFT) work on the Citizens Advice (CitA) super­-complaint about payment protection insurance, the scope of which will be announced soon.

On Wednesday the Competition Commission (CC) published its final report on store cards and the sale of related PPI.

The Commission confirmed its provisional conclusions reached in September 2005 that there is an adverse effect on competition in connection with the supply of consumer credit through store cards and associated insurance in the UK.

The CC found that there is a combination of features which prevent, restrict or distort competition in that market and has suggested remedies to tackle these concerns. The Commissions findings can be divided into two categories, those that deal with store card credit and those that deal with insurance services.

The concerns over PPI highlighted in the report overlap with those identified in the FSA's thematic work on PPI published in November 2005.

The findings and outcomes from both the CC inquiry and the FSA work will play a key role in influencing the direction of the Office of Fair Trading (OFT) work on the Citizens Advice (CitA) super­-complaint about payment protection insurance, the scope of which will be announced soon.

The Commission has decided on the following actions:

• full information on statements, including:

- the current annual percentage rate (APR) applicable to purchases;

- an estimate of interest payable next month in the event that the cardholder only makes a minimum payment;

• APR warning on store card statements where the APR is 25 per cent or more;

• provision and prominent display of facility to pay outstanding balances by direct debit.

These remedies aim to combat the following concerns:

• most store cardholders who take credit pay higher prices for that credit than would be expected in a competitive market; and

• a lack of transparency in the provision of store card credit leads to cardholders taking credit on terms which are not clear to them.

On 14 September 2005, the CC issued a remedies notice which invited comments on the actions that might be taken by the CC, or recommended for implementation by others, to remedy, mitigate or prevent the adverse effect on competition (AEC), or resulting detrimental effects on customers, as identified in its provisional findings of the same date.

In the light of evidence resulting from this notice, the CC published a Statement of Provisional Decisions on Remedies on 20 December 2005 (Provisional Remedies) which set out the CCs provisional decisions on remedies together with their supporting reasoning.

The CC provisionally decided that where store card providers offer PPI packages, they should also offer payment protection cover and a package of purchase and price protection as separate items. This arrangement should provide greater choice for customers to tailor insurance to their requirements. Customers would also be able to compare payment protection cover more readily with the open market alternative of income protection cover as a result of this arrangement.

However, in their final report the Commission has taken a backwards-step on unbundling. They have decided that there will be no requirement to offer either purchase or price protection insurance as separate elements, as they acknowledge that these elements do not currently have readily available alternatives on the open market. Moreover, they accept the views of retailers and providers that a requirement for full unbundling would also significantly increase the costs and complexity of implementation such that any benefits cardholders might gain through increased choice might be outweighed by higher costs to them.

Therefore, where store card providers offer:

1. insurance packages containing payment, price and purchase protection, they must also offer, as separate items:

i) payment protection cover alone; and

ii) a package of price and purchase protection.

2. a package of payment and price protection or payment and purchase protection, they must offer payment protection alone as a separate item. There will be no requirement, in those circumstances, to offer either price or purchase protection as separate elements.

These remedies aim to combat the following concerns:

• most store cardholders have less choice in relation to the individual elements of insurance cover sold in association with the provision and use of store cards than would be expected in a competitive market;

• some customers who revolve their store card balance will continue to pay for elements of the insurance package (purchase and/or price) that they no longer require or which no longer provide them with cover; and

• a lack of transparency in the provision of store card credit and insurance leads to cardholders taking credit or insurance on terms which are not clear to them.

The CC expects to implement these remedies by way of statutory orders to take effect in about 12 months from now.

The concerns over PPI highlighted in the CC report, including the lack of transparency and consumers paying for protection which was not relevant, overlap with those identified in the FSA's thematic work on PPI published in November 2005. To view our previous Law-Now article, FSA update on payment protection insurance, published on 4 November 2005, please click here.

The FSA thematic work focused on the level of compliance with FSA rules by firms selling payment protection insurance (PPI) with credit arrangements (including revolving credit, unsecured loans and prime and sub­prime mortgages and other secured loans). The FSA found that, while most firms were unlikely to pressurise customers into buying PPI:

• there was a risk of inappropriate sales - some firms failing to take reasonable steps to ensure customers did not buy policies on which they could not claim or which provide only limited cover

• there were inadequate controls in place for non-advised sales: some firms selling on a non-advised basis did not have adequate systems to stop their staff giving advice

• advice on PPI was likely to be of poor quality - there was a failure to assess suitability adequately. Documentation setting out reasons for a recommendation was too generalised and did not take into account a customer's specific requirements or circumstances

• the quality and timeliness of product and price disclosure by some firms selling single premium policies was poor

• the level and structure of inducements and targets for sales staff could encourage mis-selling in some firms.

The purpose of this report was to feed back the FSA's detailed findings, including examples of compliant and non-compliant practices, so that firms understood the compliance problems the FSA found and the urgent action they needed to take to address these problems. Trade associations are due to respond to the FSA’s findings by the 17^th March. Furthermore, the FSA plan to undertake another round of thematic work in the second quarter of 2006 to assess whether levels of compliance have improved.

The findings and outcomes from both the CC inquiry on store cards and the FSA work will play a key role in influencing the direction of the Office of Fair Trading (OFT) work on the Citizens Advice (CitA) super­-complaint about payment protection insurance. To view our previous Law-Now report, OFT aannounces market study into payment protection insurance, published on 16 December 2005, please click here.

The super-complaint reveals four main areas of concern for the OFT to consider:

• 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.

The OFT intends to carry out a market study into PPI, the precise scope of which will be announced soon, now that the CC has published its final report.

One of the motivations for the CC report was to determine whether a broader Commission investigation is required into PPI beyond the store card sector. In light of the findings it seems very likely that the OFT will make a further reference to the Commission to investigate the sector as a whole as part of its market study into PPI.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 13/03/2006.