Competition inquiry into loan-linked insurance

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The Independent Online

The Office of Fair Trading (OFT) is to ignore appeals from leading banks and press ahead with plans to refer the £5bn-a-year payment protection industry (PPI) to the Competition Commission.

The watchdog, which announced a preliminary decision to make the referral last October, said yesterday that despite representations from PPI businesses and trade associations, it believed its initial concerns remained valid, and that a Competition Commission inquiry was warranted. "[We have] reasonable grounds to suspect that there are features of this market which restrict competition to the detriment of consumers," said John Fingleton, the OFT's chief executive. "The evidence as a whole suggests consumers get a poor deal."

The referral is the latest stage of a 16-month probe of the PPI sector by the OFT, which was first asked to investigate in September 2005 by Citizen's Advice. The charity claimed banks, credit card providers and other lenders were racking up excessive profits by selling PPI alongside unsecured loans.

The insurance, which is supposed to cover borrowers' repayments in the event they cannot work due to ill-health or unemployment, has been widely criticised as expensive, particularly when bought from lenders rather than independent suppliers. In some cases, PPI appears to have been sold to borrowers for whom it is not suitable.

Last October, the OFT said it believed consumers failed to shop around for PPI, found it difficult to compare products because the insurance was so complicated, and were sometimes misled into thinking that buying PPI would give applications for credit more chance of succeeding.

Citizen's Advice last night welcomed the OFT's decision, but complained about the length of time the inquiry was taking. The Competition Commission, which has wide-ranging powers to force companies to improve consumer choice or even to stop selling certain types of policy, now has up to two years to conduct its own investigation, before deciding if any remedies are needed.

Sue Edwards, a senior policy adviser at Citizen's Advice, said: "We need swifter action to protect consumers... the lengthy process since our 2005 complaint is doing little to protect people from PPI rip-offs in the meantime."

Pula Houghton, a personal finance campaigner at Which?, the consumer group, said: "Expensive PPI products, often not fit for purpose, are being consistently mis-sold."

However, lenders, who have become increasingly dependent on PPI sales to boost profits, were dismayed by the referral. Martin Hall, director general of the Finance and Leasing Association, said: "We are disappointed the referral was taken after hasty research without full and detailed consultation with the industry about possible remedial steps."

City regulators have also focused close attention on how PPI is sold. The Financial Services Authority is thought to be considering fining up to 10 banks for sales failures linked to the insurance. Last week, it fined GE Capital Bank £600,000 for failing to provide adequate levels of protection for customers buying PPI.