Probe into £2bn insurance 'rip-off'

OFT orders inquiry into £5.5bn payment protection market. City watchdog slates providers
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An investigation was ordered into the payment protection market yesterday after claims that insurance companies, banks and other lenders are overcharging consumers by as much as £2bn on policies designed to cover them for failing to make loan repayments.

The OFT said it intended to refer the £5.5bn market to the Competition Commission, after concluding that competition between providers was not delivering choice or value to consumers.

Separately, the Financial Services Authority, the chief City watchdog, launched a scathing attack on providers for failing to demonstrate that they consistently treated customers fairly.

Payment protection insurance (PPI) is most often sold by banks and credit card lenders, alongside mortgages, unsecured loans and credit card accounts. Some 7 million policies are sold each year and are supposed to cover policyholders if they cannot keep up debt repayments due to ill-health or unemployment.

The OFT's investigation of the sector follows a super-complaint about the PPI market filed by Citizens Advice in September 2005. Yesterday, the watchdog upheld many of Citizen's Advice's complaints about excessive chargesand unfair sales tactics

John Fingleton, the OFT's chief executive, said: "Evidence suggests that how consumers purchase their PPI, their understanding of the product and the quality of information available to them hinders competition."

The OFT's investigation found that borrowers rarely shopped around for PPI, even though standalone insurers almost always offered better value. It also said it was too difficult to compare different policies and warned that some borrowers had been given the impression that buying insurance would give them more chance of getting credit, even though such a link is illegal.

The regulator is particularly concerned about excessive profits. It said PPI claims accounted for between 15 and 20 per cent of premiums annually, compared with 55 per cent for home insurance. On this basis, the annual excess profit would be £2bn.

Clive Briault, director of retail markets at the FSA, said its inquiries showed PPI sales staff often failed to check policies were suitable for customers, or to tell them about claims that might be excluded. The watchdog is also concerned that many lenders demand a single payment for PPI, rather than allowing customers to spread the cost of the cover. This also prevents them cancelling the insurance at a later date. In some cases, PPI premiums are added to the debt, thus incurring interest charges.

"The industry has further to go to demonstrate that customers really are being treated fairly," said Mr Briault.

Simon Burgess, managing director of British Insurance, an independent insurance adviser, described the cost of leading lenders' policies as "ridiculously expensive". Mr Burgess said an independent provider would charge around £50 a year to protect the repayments on a £10,000 loan over five years. Royal Bank of Scotland's quote for the same loan would be around £600.

Analysts warned that a crackdown on PPI could hit leading banks hard. Although none publish detailed figures on the profits generated by PPI, Britain's five biggest retail banks - Barclays, Halifax Bank of Scotland, HSBC, Lloyds TSB and Royal Bank of Scotland - control about two-thirds of the market.

However, the British Bankers Association defended sales of PPI. "We are pleased that the FSA has recognised that payment protection insurance provides a valuable safety net to protect against unexpected financial crises caused by circumstances such as redundancy or ill health," said Ian Mullen, the BBA's chief executive.

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