Payment Protection Insurance ("PPI") - Major Market Intervention By The Competition Commission

Providers of PPI face a prohibition on the selling of PPI at the point of sale of credit, as well as a prohibition on the selling of single-premium PPI policies, under proposals ("remedies") published by the Competition Commission (the "CC") on 13 November 2008.

The CC is expected to make its final decision in mid-January 2009, and it is expected that there will be a transition period of up to twelve months, but possibly as little as six months for some of the measures, during which time providers will need to make substantial changes to their procedures and documentation for the marketing, selling and administration of PPI policies.

The remedies package is the culmination of a detailed inquiry, which began with a "super-complaint" to the Office of Fair Trading ("OFT") on 13 September 2005 by Citizens Advice. The OFT referred the supply of all PPI to the CC on 7 February 2007, on the basis that the OFT had "reasonable grounds for suspecting" that there were features of the market that prevented, restricted or distorted competition. The reference did not include store card PPI, but it did include retail (home shopping) PPI. Retail PPI is not covered by the current proposals, but the CC is continuing to consider possible remedies for retail PPI.

As part of its investigation, the CC received a substantial number of submissions from interested parties, including underwriters, distributors and intermediates, and it also conducted hearings.

The CC published its Provisional Findings and Notice of Possible Remedies on 5 June 2008, in which the CC stated that it had provisionally found competition problems with the PPI market. On 13 November 2008, the CC published its Provisional Decision on Remedies. This is open for consultation until 4 December 2008, and the CC has specifically asked for representations about implementation costs and other factors regarding the detailed implementation of the remedies package.

WHAT DID THE CC FIND?

• The CC found that distributors and intermediaries failed actively to seek to win customers by using the price or quality of their PPI policies as a competitive variable.
• Consumers interested in comparing various PPI policies were hindered in doing so. Furthermore, consumers faced confusion in their perception that taking PPI would increase their chances of being given credit. The bundling of PPI with credit in a particular transaction further restricted consumer choice.
• The CC found that consumers were hindered by the time it takes to obtain accurate price information. This impeded consumer ability to make comparisons, and therefore effective choices between PPI policies. It also made expansion by other PPI providers, especially providers of stand-alone PPI, difficult.
• Consumers wishing to switch their PPI policies to alternative providers or alternative types of insurance policies were impeded from doing so.
• The sale of PPI at the point of sale by credit providers further restricted the extent to which other providers could compete effectively.

WHAT ARE THE PROPOSED REMEDIES?

The proposed remedies are a series of measures aimed to increase competition in the PPI market. The following measures in particular have been proposed:

1. A prohibition on the sale of PPI to a customer within 14 days of the sale of credit to that customer. A customer would be able pro-actively to return to the supplier to initiate a purchase, by telephone or online, from 24 hours after the credit sale.
2. A requirement on credit providers to provide a "personal PPI quote", stating the cost of the policy individually and together with the loan APR which would result from the inclusion of the cost of the PPI. The 14- day period would only start from the date on which this is provided to the customer.
3. A prohibition on the selling of singlepremium PPI policies. The CC currently takes the view that requiring pro-rata rebates on such policies, instead of a prohibition, would not be sufficiently effective.
4. A requirement on all PPI providers to provide certain information and messages in PPI marketing materials, and a requirement on distributors to advertise personal loan and second-charge mortgage PPI alongside their respective credit advertisements. Providers would have to give the price of their PPI, expressed in a common format of monthly cost per £100 of cover, and they would have to state that PPI is optional and available from other providers.
5. A requirement on all PPI providers to provide certain information on PPI policies to the Financial Services Authority (the "FSA"), and a recommendation to the FSA that it use the information for its PPI price comparison tables.
6. A requirement on distributors to provide an annual statement for PPI customers, including information similar to that provided in the personal quote, to encourage customers to review their PPI policy annually and make it easier for customers to decide whether to switch. The CC expects that this remedy is one of those elements of the remedies package that could be implemented within six months.

NEXT STEPS

It will be seen that the CC is proposing major interventions in the PPI marketplace, which will have a significant impact on the industry.

In the short term, providers need to assess the extent to which they may wish to make representations to the CC on the remedies package, by the deadline of 5 p.m. on 4 December. Providers should urgently consider in particular whether to submit to the CC that less far-reaching remedies would be as effective to deal with the identified competition concerns.

In the medium term, providers should assess, and prepare for, the significant changes that will be necessary in order to comply with the final decision on the remedies package. As mentioned above, this is expected to be published in mid- January 2009, although it may be delayed until 6 February 2009 at the latest. Planning now will avoid an inefficient and potentially more costly rush to comply as the deadlines approach.

HOW SALANS CAN HELP

The combination of our specialist knowledge of the consumer credit sector and our leading competition practice mean that Salans is ideally placed to assist PPI providers in assessing the impact of the changes and in ensuring full compliance in the most efficient way.

We are standing by to give our immediate reaction to the final decision of the CC, and to provide industry-focused, commercial advice on meeting the challenges posed by the remedies package.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.