High street banks are set to lose an important source of income after regulators insisted yesterday they would press ahead with tough new restrictions on the sale of payment protection insurance (PPI).
The Competition Commission said it would ban the sale of PPI – which pays out in the event borrowers can't keep up with repayments due to ill-health or unemployment – alongside the establishment of a credit card, loan and mortgage agreement.
The ruling means banks will no longer be able to sell the insurance to customers at the time they borrow, or during a fixed period – possibly 14 days – thereafter. The Commission said most borrowers had no idea PPI was widely available from providers other than their lender, and that they therefore rarely shopped around for a better deal on price or terms.
The product has also been at the centre of several mis-selling scandals, with a string of lenders accused of selling insurance to customers for whom it was not suitable.
Peter Davis, the deputy chairman of the Commission, said: "We found that many customers would place very significant value on being given the time and space to choose the right PPI product – or indeed to decide that PPI is not right for them."
The Commission's ruling yesterday mirrors the judgment it first gave last year, when it pledged similar action. That decision was subsequently challenged by lenders such as Barclays Bank and Lloyds Bank, with the Competition Appeals Tribunal last October ordering the Commission to review its findings.
The banks argued that many customers were happy to buy PPI from their loan, mortgage or credit card providers when first agreeing to borrow – and that they would find it inconvenient to have to wait to buy such cover, or to be forced to find an alternative source of insurance.
However, Mr Davis said: "Overall, we concluded that PPI providers are overstating the loss of convenience that would result from the introduction of a prohibition on selling PPI during the credit sale." Consumer groups welcomed the ruling, which the Commission said it intended to implement as soon as possible after July, when a consultation period on its proposals ends.
"Having made our complaint about PPI to the Office of Fair Trading back in 2005 we are pleased this decision marks a significant further step in this process," said Peter Tutton of Citizens Advice.
"However the wider PPI agenda is not finished. People need to think about protecting their debts, but it's currently difficult for consumers to choose good-value products suited to their needs. The challenge now is to produce better effective simpler products at a fair price."
Peter Vicary-Smith, chief executive of Which? added: "It's important that PPI is sold separately from other financial products to help consumers make an informed choice and find the protection product that best suits their needs – the industry should now concentrate on developing protection products that offer better cover and value for money to its customers."
However, the banking industry was upset. "We are very disappointed the Competition Commission has decided to pursue a point-of-sale prohibition for PPI," said a spokesman for the British Bankers' Association.
"There is a real danger this will result in fewer people taking out PPI, leaving them with no protection if they lose their job. The Commission's decision could ultimately result in driving more people into bankruptcy as their debts will not be covered."
PPI generated an average pre-tax profit of £1.5bn a year for the banking industry between 2005 and 2009, the Commission said, though sales slowed dramatically last year as consumer borrowing slumped.
The industry has also seen mounting costs from consumers claiming redress for policies wrongly sold in the past. The biggest PPI distributors paid out £177m to settle complaints in the first 11 months of 2009, up from £55m for the whole of 2008.
Cost benefit analysis
The average annual pre-tax profit earned by the banking industry as a whole from PPI between 2005 and 2009.
The total compensation paid out in the first 11 months of last year to consumers wrongly sold PPI contracts.