OFT starts payment protection inquiry

The Office of Fair Trading launched its long-awaited inquiry into the £5.4bn market for payment protection insurance (PPI) yesterday, threatening to clamp down on the excessive profits enjoyed by Britain's banks and insurers.

The investigation follows a super-complaint made by the Citizens' Advice Bureau servicein September, which said PPI - designed to provide cover for loan repayments in the event of sickness or unemployment - was being mis-sold to thousands of customers who did not need it.

Analysts at Credit Suisse estimate PPI accounts for more than 10 per cent of gross profits at Barclays, Lloyds TSB, Alliance & Leicester and Northern Rock. HBOS and Royal Bank of Scotland are estimated to generate about 8 and 7 per cent of their profits from it.

The high levels of earnings are caused by the extremely low claims levels, compared with other types of insurance. Research by the CAB found only 15 per cent of claims were successful, with many policyholders finding a technicality had left them uncovered when they needed to make a claim. The CAB also accused the banks of overcharging for PPI, with premiums sometimes equivalent to 25 per cent of the entire loan.

A recent survey by uSwitch, the comparison service, discovered PPI on a Bank of Scotland personal loan increased the annual interest rate from 6.4 per cent to 22.7 per cent.

Launching its inquiry, the OFT said its preliminary investigations had supported the CAB's findings and justified the need for a full-scale inquiry. It said consumers faced difficulties in shopping for PPI, adding that there was a wide variation in pricing across the industry.