UK: CC Publishes PPI Issues Statement

The Competition Commission (CC) published the issues statement in its payment protection insurance (PPI) inquiry on 12 April 2007. This is a standard procedure in all CC inquiries. The issues statement sets out the questions and areas the CC believes are relevant in deciding whether any feature of the market(s) for PPI products restricts, distorts or prevents competition. The CC has stated that the issues statement is aimed at assisting those submitting evidence to it to focus on the issues the CC envisages as being central to its investigation.

The CC has specifically noted that its inquiry focuses on competition issues relating to PPI and cannot make decisions in individual mis-selling cases or deal with issues such as responsible lending.

The issues statement focuses on a number of areas:

• Market definition – e.g. is it appropriate to identify four main PPI product categories, namely PPI on first-charge mortgages, PPI on second-charge mortgages and other secured loans, PPI on unsecured loans and PPI on credit card repayments?

• The retail market for PPI – e.g. do customers demand PPI as a standalone product or regard it as part of a credit package with the underlying credit product? To what extent do credit distributors have a point of sale advantage over other potential providers of PPI? To what extent do customers switch between PPI providers and how sensitive are PPI customers to the price of PPI products? The CC also wishes to understand other factors such as the costs associated with providing retail PPI, the extent to which sales of credit products are made conditional upon customers buying the associated PPI product and whether the need to develop a distribution network constitutes a barrier to entry in this sector.

• The wholesale market for PPI – while the CC expects the primary focus of its inquiry to be on the retail market, it will nevertheless examine competition in the wholesale supply of PPI. It will consider issues including whether wholesale customers put PPI services out to competitive tender and the nature of the tender process, the costs of underwriting PPI and the extent of competition between wholesalers.

• Prices – the CC will consider whether prices are set at competitive levels. Relevant issues are likely to include the extent to which PPI prices reflect costs and the extent to which differences between providers’ costs can be explained by differences in costs or other factors such as demand conditions. This may involve analysing the claims ratios of different PPI products compared to other insurance products.

• Profitability – the CC may consider whether and to what extent the profitability of the underwriting and retailing of PPI can be usefully measured.

In the light of the CC’s concerns, those active in the sector should consider their business practices, their responses to the CC and their strategic plans for future PPI activities.

The CC expects to hold hearings with interested parties during May- July 2007 and to publish its emerging thinking in the inquiry in autumn 2007. The inquiry must publish its final report by 6 February 2009 although it aims to do so earlier than this deadline.

Please click here for the CC’s issues statement.

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 12/04/2007.