| PAYMENT PROTECTION INSURANCE – The Competition Commission of the UK has just published its report on PPI, and suggests possible remedies to the serious nature of the market failures. |
(NB: The Competition Commission is an independent public body which conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries).
05 June 2008
PAYMENT PROTECTION INSURANCE (PPI): PROVISIONAL FINDINGS PUBLISHED.
Companies face little or no competition when selling Payment Protection Insurance (PPI) to their credit customers and as a result customers appear to be overcharged by over £1.4 billion a year, the Competition Commission (CC) has said in its provisional findings report into the sale of PPI in the UK.
The report, which is published today at http://www.competition-commission.org.uk, finds that the vast majority of the UK's more than 14 million PPI policies are sold at the same time as a consumer takes out a loan or other type of credit. Many consumers are unaware that they can buy PPI from other providers and rarely shop around to compare prices and policies. This makes it difficult for other providers to reach these customers and in the absence of such competitive pressure, the distributors-such as banks, mortgage providers and credit card providers-are able to charge higher prices.
The CC has also today published a wide-ranging list of potential measures to increase competition in the PPI market. The measures under consideration would provide better information to customers about what they are buying and the price of the PPI relative to the price of loans, improve their ability to compare products, and make it easier for them to switch between providers-including a possible prohibition on selling single-premium policies.
The CC is considering tackling the 'point-of-sale' advantage enjoyed by sellers of credit and is consulting on whether it is necessary and appropriate to ban the sale of PPI at the same time as the associated credit product, in order to improve competition. Other measures include the possible introduction of a price cap as a temporary measure to reduce prices, and additional proposals to enhance the ability of suppliers to compete more effectively with the company selling PPI with a loan or other credit product.
Inquiry Chairman and CC Deputy Chairman, Peter Davis, said:
We've found serious problems with the PPI market and customers are paying for the lack of competition. The way PPI is sold as an 'add-on' to a loan or other credit product means distributors escape the pressure they should face from competing suppliers. Distributors don't appear to compete much with each other on either price or quality of PPI; neither do they appear to do much direct advertising of PPI to win customers from each other.
Most consumers understandably focus on the loan or credit and its APR and tend to make a snap decision when the PPI product is then offered to them, rather than looking at the true cost of the credit and PPI together, or at the range of PPI products available. In fact, many customers simply aren't aware that they can get PPI elsewhere, potentially for less and equally others believe that buying PPI from the provider increases their chance of getting a loan.
The actual cost of PPI relative to credit is not easy for consumers to work out. There would clearly be benefits to searching around for many customers, in terms of lower prices, but the difficulty of comparing products makes it very hard work. As a result, few consumers do actually shop around for PPI or subsequently switch between providers. In turn, that means credit providers aren't under much competitive pressure and so consumers are getting a raw deal.
We're now consulting on a range of possible measures to ensure PPI customers get a better deal by emphasizing their right to choose, by improving their ability to compare prices and products and by making sure that they're making a considered and informed decision when they take out the cover. We're also looking at measures which will improve competition between providers, so that consumers who do compare products, or seek to switch, find better offers to choose from. We want to see which measures will be most effective and practical in addressing these problems.
Whilst we did not see strong evidence of cross-subsidies between PPI and mortgages or credit cards, the evidence does suggest that, in the case of personal loans, high prices for PPI are subsidizing the interest rates being offered by some, but not necessarily all, providers. When considering what action to take, we'll have to consider to what extent cross-subsidy is an important customer benefit and weigh that against the obvious disadvantages of high PPI prices and lack of choice that the evidence strongly suggests consumers are suffering from at the moment.
We've obviously been aware of the issue of mis-selling during this inquiry. The industry regulator, the Financial Services Authority (FSA), takes the lead on regulating sales practices, and the Financial Services Ombudsman (FOS) deals with consumer disputes. Our focus has been on examining whether there is effective competition in the market as a whole. In taking action to improve competition between companies selling PPI we shall be enhancing the incentives for companies not only to compete on price but to compete on non-price factors such as quality and service.
PPI covers repayments on credit products if the borrower is unable to do so due to loss of earnings as a result of accident, sickness, unemployment or (in many cases) death. PPI is sold to cover a variety of financial products, but over 90 per cent of PPI sold in the UK in 2006 was either: personal loan PPI, credit card PPI, mortgage PPI or second-charge mortgage PPI.
The CC's main findings are:
* Distributors and intermediaries fail actively to seek to win customers by using the price or quality of their PPI policies as a competitive variable.
* Consumers who want to compare PPI policies (including PPI combined with credit), stand-alone PPI or short-term income protection insurance policies are hindered in doing so. Product complexity (the variations in terms and conditions, the way information on PPI is presented to customers); the perception that taking PPI would increase their chances of being given credit; the bundling of PPI with credit; and the limited scale of stand-alone provision act as barriers to search for all types of PPI policies. In addition, the time taken to obtain accurate price information is a barrier in relation to the provision of personal loan PPI, mortgage PPI and second-charge mortgage PPI. These barriers to search impede the ability of consumers to make comparisons, and therefore effective choices, between PPI policies. They also, therefore, act as barriers to expansion for other PPI providers, in particular providers of stand-alone PPI.
* Consumers who want to switch PPI policies to alternative providers or to alternative types of insurance policies are hindered in doing so. Terms which make switching expensive (in the case of single-premium policies) act as barriers to switching for personal loan PPI and second-charge mortgage PPI policies. Terms which risk leaving consumers uninsured (for a short period of time or in case they suffer a recurrence of a condition) act as barriers to switching for all types of PPI policies. In addition, the lack of access to consumers' balance information acts as a barrier for switching for credit card PPI and for retail PPI as it renders stand-alone providers unable to offer equivalent credit card PPI or retail PPI policies. These barriers to switching limit consumer choice. They also therefore act as barriers to expansion for other PPI providers, in particular providers of stand-alone PPI.
* The sale of PPI at the point of sale by credit providers further restricts the extent to which other providers can compete effectively.
The CC has provisionally not found problems with the upstream PPI market-ie the companies which underwrite the insurance-but instead focused on the 'distributors' which sell PPI when they sell their credit products. There are some stand-alone providers of PPI which offer PPI to other companies' credit customers, but they have struggled to get a foothold.
The list of potential measures being considered to address the competition problems provisionally found is:
Measures to increase customer search and address the failure of distributors to compete on price
* Standard disclosure on advertising and marketing material of the cost to the customer of taking PPI along with a requirement to provide a statement of 'key messages', which alert customers to the existence of other PPI products, sources of comparative information and that PPI is optional and does not increase the likelihood of obtaining credit.
* Further standardization of PPI information given to the customer at the point of sale, using a standard format for the disclosure of price and other information to allow easier comparison of products across the market and also require firms to prove 'firm quotes' on PPI in writing.
* Obligation to provide information about PPI and credit products to third party providers of comparative information for publication.
Measures to address the point-of-sale advantage
* Prohibition on selling PPI at the credit point of sale and within a fixed time period of the credit sale.
Measures to address barriers to switching
* A requirement for all policies to be renewed annually.
* A requirement to provide an annual statement of the cost of PPI and a reminder of the customer's right to cancel and early settlement terms.
* Remedies to address problems with single premium policies-either prohibiting these, or ensuring a choice of regular premiums alongside single premiums and/or requiring that single-premium products meet minimum terms for early settlement rebates and additional charges.
* Minimum standards for elements of PPI policies that act as a barrier to switching (initial exclusion periods and pre-existing conditions qualification periods).
* Obligation to share information about customer claims, which could enable the possible introduction of 'no claims' discounts.
* Obligation to share information about the customer's credit card balance with an underwriter nominated by the customer.
Measures directly to address consumer detriment associated with high PPI prices
* Imposition of price caps for a limited period in parallel with some of the remedies outlined above to enable prices to be brought closer to competitive levels more rapidly while the other proposed measures take effect.
The CC would like to hear views on the provisional findings report and notice of remedies from all interested parties, in writing, by 30 June 2008. To submit evidence, please write to:
The Inquiry Secretary (PPI market inquiry)
Competition Commission
Victoria House
Southampton Row
LONDON
WC1B 4AD
Or email: PPI@cc.gsi.gov.uk.
Notes for editors
1. The CC is an independent public body, which carries out investigations into mergers, markets and the regulated industries.
2. Enquiries should be directed to Rory Taylor on 020 7271 0242 or rory.taylor@cc.gsi.gov.uk.
3. The members of the PPI inquiry group are Peter Davis (Group Chairman and CC Deputy Chairman), John Baillie, Christopher Bright, Professor John Cubbin and Richard Farrant.
4. The Office of Fair Trading (OFT) referred the PPI market for investigation by the CC in February, following its initial study into the sector in response to a 'super-complaint' from Citizens Advice. Under the Enterprise Act 2002, the OFT can make a market investigation reference to the CC if it has reasonable grounds for suspecting that competition is not working effectively in that market.
5. Following such a reference, the CC carries out a comprehensive investigation, so that it can ultimately come to a final decision about whether any features of the market prevent, restrict or distort competition and, if so, what action might be taken to remedy these.
6. Market investigation references are intended to focus upon the function of a market as a whole rather than the conduct of a single firm in a market. If the OFT has concerns about the conduct of a single firm or firms that have engaged in anti-competitive agreements, it will first consider whether those actions infringe the Competition Act 1998.
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MARKET INVESTIGATION INTO PAYMENT PROTECTION INSURANCE
NOTICE OF POSSIBLE REMEDIES UNDER RULE 11 OF THE COMPETITION COMMISSION RULES OF PROCEDURE
INTRODUCTION
1. On 7 February 2007, the Office of Fair Trading (OFT) referred the supply of all payment protection insurance services (except store card payment protection insurance services) to non-business customers in the UK (‘the supply of PPI’) to the Competition Commission (CC) for investigation. The reference was made under sections 131 and 133 of the Enterprise Act 2002 (the Act).
2. In its Notice of provisional findings on the reference published on 5 June 2008, the CC found provisionally that there are features of the market either alone or in combination which prevent, restrict or distort competition within the relevant markets, such that there is an adverse effect on competition (AEC) within the meaning of section 134(2) of the Act.
3. This notice invites comments on the actions that might be taken by the CC, or that the CC might recommend for implementation by others, for the purpose of remedy-ing, mitigating or preventing the AEC concerned or any resulting detrimental effect on customers.
PROVISIONAL FINDINGS
4. The CC provisionally found a number of features in the supply of PPI that give rise to an AEC and result or may be expected to result in detrimental effects on consumers in the form of higher prices and less choice.1 These features, which are summarized in Section 8 of the provisional findings, are that:
(a) Distributors and intermediaries2 fail actively to seek to win customers by using the price or quality of their PPI policies as a competitive variable.
(b) Consumers who want to compare PPI policies (including PPI combined with credit), stand-alone PPI or short-tem IP policies are hindered in doing so. Product complexity (the variations in terms and conditions, the way information on PPI is presented to customers); the perception that taking PPI would increase their chances of being given credit; the bundling of PPI with credit; and the limited scale of stand-alone provision act as barriers to search for all types of PPI policies. In addition, the time taken to obtain accurate price information is a barrier in relation to the provision of PLPPI, MPPI and SMPPI. These barriers to search impede the ability of consumers to make comparisons, and therefore effective choices between PPI policies. They also, therefore, act as barriers to expansion for other PPI providers, in particular providers of stand-alone PPI.
(c) Consumers who want to switch PPI policies to alternative PPI providers or to alternative insurance products are hindered in doing so. Terms which make switching expensive (in the case of single-premium policies) act as barriers to switching for PLPPI and SMPPI policies. Terms which risk leaving consumers uninsured (for a short period of time or in case they suffer a recurrence of a condition) act as barriers to switching for all types of PPI policies. In addition, the lack of access to consumers’ balance information acts as a barrier for switching for CCPPI and retail PPI. These barriers to switching limit consumer choice. They also, therefore, act as barriers to expansion for other PPI providers, in particular providers of stand-alone PPI.
(d) The sale of PPI at the point of sale by credit providers further restricts the extent to which other PPI providers can compete effectively.
CRITERIA FOR CONSIDERATION OF REMEDIES
5. In choosing appropriate remedial action, the CC has a duty to achieve as comprehensive a solution as is reasonable and practicable to the AEC and any detrimental effects on customers resulting from it as set out in section 134(6) of the Act.
6. The CC will consider the effectiveness of different possible remedies and their associated costs and will have regard to the principle of proportionality. Between two remedies that the CC considers equally effective, it will choose that which imposes the least cost or restriction.
7. The CC will also have regard to the effects of any remedial action on any relevant customer benefits within the meaning of section 134(8) of the Act arising from the feature or features of the market concerned. Such benefits comprise lower prices, higher quality, greater innovation or greater choice of goods or services. In this case relevant customer benefits may arise within PPI markets or in relation to other goods and services, such as credit products. The CC invites well-evidenced submissions on the nature, scale and likelihood of any such benefits and the potential impact of any possible remedies on any such benefits.
8. Some of the remedy options put forward in this notice would clearly be for the CC to implement. Other remedy options may be capable of implementation by the CC making recommendation to others, for example to the Financial Services Authority (FSA) or the OFT. The CC will seek to achieve a coherent approach, as between the implementation of remedies following this investigation and the existing regulatory framework. However, the CC also notes that where it falls to others to make a decision on a recommendation, there may be uncertainty over whether and to what timescale any recommendation will be accepted and implemented. It will be neces-sary to take this inherent uncertainty into account when deciding whether to make such a recommendation.
POSSIBLE REMEDIES ON WHICH VIEWS ARE SOUGHT
9. Having provisionally found an AEC, the CC is considering whether remedial action is necessary and if so what action should be taken. The various measures alone or in combination that are currently being considered by the CC as possible remedies to the AEC and customer detriment that have been identified in the provisional findings, and on which comments are invited, are set out below.
10. It is not clear at this stage that any single remedy would comprehensively remedy the AEC and the resulting customer detriment. So it may be necessary to adopt more than one of the remedies set out below. The remedies chosen by the CC would then be taken together and would create a remedy package. Furthermore, not all of the remedies may be adopted as some of the remedies within this notice are to the exclusion of other remedies under the same heading. The CC is considering 11 possible remedies, which are grouped under the following headings:
(a) measures to increase customer search and address the failure of distributors to compete on price;
(b) measures to directly address the point-of-sale advantage;
(c) measures to reduce switching costs; and
(d) measures to address the consumer detriment resulting from high prices.
MEASURES TO INCREASE CUSTOMER SEARCH AND ADDRESS THE FAILURE OF DISTRIBUTORS TO COMPETE ON PRICE
11. The CC has provisionally found that customers’ ability to compare products is reduced by an absence of information provided in a way that would help consumers. The CC has also provisionally found that few distributors actively seek to win credit and/or PPI business, by using the price (or non-price characteristics) of their PPI product as a competitive variable.
12. Options 1 to 3 are primarily aimed at reducing search costs, thereby increasing competitive pressure on PPI distributors.
OPTION 1 STANDARD DISCLOSURE OF COST TO THE CUSTOMER OF PPI AND CREDIT AND REQUIREMENT TO PROVIDE A STATEMENT OF ‘KEY MESSAGES’ ON ADVERTISING AND MARKETING MATERIAL
13. The CC is considering requiring distributors who offer PPI and credit products to disclose, in advertising and marketing material:
(a) the annual cost to the customer of the interest and charges payable on the credit product;
(b) the annual cost to the customer of taking the PPI product;
(c) the annual cost to the customer of the combination of the credit product with the PPI product; and
(d) a short statement of key messages alerting customers:
(i) to the existence of alternative PPI products (including stand-alone PPI); (ii) to the existence of the FSA comparative tables and possibly other sources of information about the cost of PPI and of insured credit (eg other price comparison sites); and (iii) that purchasing PPI is optional and does not increase the likelihood of obtaining credit.
14. This remedy would make it easier for customers to compare PPI products offered by different providers and to search for alternative PPI offers, including stand-alone PPI. By increasing the prominence of PPI prices within the information provided to customers, it would also help address credit providers’ failure to compete actively on the price of their PPI products. The CC invites views on the following questions:
(a) Which advertising and marketing material should carry this information? For example, should this information be required for all credit advertisements and marketing material issued by PPI distributors, or should the obligation be triggered by, for example, the inclusion of a typical APR for the credit?
(b) How should costs to the customer be expressed? For example, the CC is considering:
(i) whether the annual cost of credit plus PPI should be expressed as both an annual rate (equivalent to the APR used to disclose the price of credit) and as a cash amount (eg £200 a year); and
(ii) whether the whole-life cost to the customer of taking out a PPI policy should also be disclosed to the customer.
(c) Whether the key messages (in paragraph 13(d)) are relevant for all PPI products and whether there are other key statements which should be communicated in all PPI advertising and marketing materials.
(d) Should credit intermediaries also be required to disclose this information in their advertising and marketing material?
(e) How this remedy could best be implemented, particularly given its interaction with the FSA financial promotion regime and the Consumer Credit Act 2006 (CCA 2006) regulations.
OPTION 2 FURTHER STANDARDIZATION OF PPI INFORMATION GIVEN TO THE CUSTOMER AT THE POINT OF SALE
15. The CC is considering requiring distributors to use a standard format for the dis-closure of price and other information given to the customer at the point of sale. The CC is also considering whether customers should be provided with a written offer if requested for PPI specific to them and valid for a fixed period of time (a ‘firm quote’). This would increase the ability of customers to compare the price and benefits of competing PPI products, reducing search costs and increasing competitive pressure on distributors.
16. The CC is aware that the FSA requires distributors to give customers a number of documents at the point of sale or immediately after regarding the nature of the product and services the firm is offering. The content in these documents is outlined in the Insurance Conduct of Business Sourcebook (ICOBS) and in one case an optional standard template is provided. The CC is considering whether certain standard documents or additional material given to customers at the point of sale should follow a standard template and what information should be in them, in particular, in relation to the presentation of price4 and the key messages set out in Option 1. The CC is also considering whether customers should be provided with information about claims ratios5 in these documents.
17. The CC invites views on the following questions:
(a) What are the costs and benefits of further standardization in this area?
(b) What changes, if any, are required to the FSA standard disclosure templates, to assist product comparison? Are there other appropriate templates which should be considered?
(c) Should details of the full-life costs of PPI policies, of the annual or monthly costs or of all of these price measures be provided to customers?
(d) What information should be provided in the firm quote? For example, should the firm quote contain information on both the credit and the PPI and for how long should the quote be valid?
(e) If firm quotes were provided for credit as well as PPI by the distributor, how should they be recorded by credit reference agencies?
(f) Should credit intermediaries, such as mortgage brokers, also be required to disclose this information at the point of sale and to offer firm quotes?
(g) To maximize comparability, should stand-alone PPI providers be required to pro-vide information on the same basis as distributors?
(h) How might any such remedy best be implemented?
OPTION 3 OBLIGATION TO PROVIDE INFORMATION ABOUT PPI AND CREDIT PRODUCTS TO THIRD PARTY PROVIDERS OF COMPARATIVE INFORMATION FOR PUBLICATION
18. The CC is considering requiring distributors to provide information in an appropriate format about their PPI and credit products to third parties (including operators of comparative websites, market research companies and publishers of ‘best buy’ tables), for its use by those third parties in published comparative information. This would enable third parties to publish information which would better enable cus-tomers to compare the cost of PPI and credit with PPI.
19. The CC invites views on the following questions:
(a) What information about prices and terms should distributors be required to provide to third parties?
(b) Should distributors be required to provide information on credit products and bundles of credit with PPI as well as information about PPI products?
(c) Should information about the claims ratios for any PPI product which distributors make available to customers be provided to third parties and what would be the best way to calculate the claims ratio for this purpose?
(d) To maximize comparability, should stand-alone PPI providers be required to provide the same information on PPI to third parties as distributors?
(e) In what format should information be provided?
(f) How might any such remedy best be implemented?
MEASURES TO ADDRESS THE POINT-OF-SALE ADVANTAGE
20. The CC has provisionally found that a credit provider enjoys significant advantages over other PPI providers, when selling credit and then PPI to their credit customers at the credit point of sale. The CC has provisionally concluded that the sale of PPI at the credit point of sale is a feature of PPI markets, which prevents, restricts and distorts competition. Option 4 is aimed at addressing this feature directly.
OPTION 4 PROHIBITION ON SELLING PPI AT THE CREDIT POINT OF SALE AND WITHIN A FIXED TIME PERIOD OF THE CREDIT SALE
21. The CC is considering mandating that PPI may not be sold at the same time as the credit product, nor within a fixed time period of the credit sale (or in the case of CCPPI, also at the point that the credit is activated). This would directly address the point-of-sale advantage enjoyed by distributors, providing a greater incentive and opportunity for customers to search for PPI after the credit sale and for stand-alone providers to enter PPI markets. The CC invites views on the following questions:
(a) What should be the length of any fixed period within which distributors would be prohibited from contacting their credit customers to offer PPI (eg 90 days or some other period)?
(b) As a supporting measure, should all distributors inform customers of the exist-ence of alternative PPI products, including stand-alone PPI, when selling the credit product (for example, by disclosing the ‘key messages’ set out in Option 1 at the credit point of sale)?
(c) Should this prohibition also apply to sales of PPI by credit intermediaries, such as mortgage brokers?
(d) What would be the impact of this measure on the availability of PPI?
(e) How might such a remedy best be implemented?
MEASURES TO ADDRESS BARRIERS TO SWITCHING
22. The CC has provisionally found that there are barriers to switching, which prevent, restrict and distort competition. Some of these barriers are common across all PPI types, while others currently apply only to particular forms of PPI, for example single premium policy issues are only relevant to PLPPI and SMPPI. Options 5 to 10 are remedies being considered by the CC to reduce barriers to switching.
OPTION 5 ALL POLICIES TO BE RENEWED ANNUALLY
23. The CC is considering whether to require that all PPI policies be renewed every 12 months from the date they are taken out by a customer. Customers who wished the policy to continue for a further 12 months would need to confirm that to the provider, by ‘opting in’ to the policy on an annual basis. For single premium policies, customers who did not ‘opt in’ would be rebated the early settlement amount in cash.
24. This remedy would increase the competitive pressure on distributors, by creating an annual break in all PPI policies and giving customers more and better defined oppor-tunities to switch. The CC notes that many insurance policies (eg motor and home insurance) must be renewed on an annual basis.
25. The CC invites views on the following questions:
(a) What is the likely impact on customers of this remedy?
(b) At the point of renewal of the policy, would a customer need to enter into a new PPI contract with the underwriter?
(c) What implications (if any) would an annual renewal have on waiting periods, and pre-existing conditions qualification periods?
(d) Should single premium policies be treated differently to regular premium policies?
(e) Should any discretion be allowed as to how any rebate of the single premium should be paid (ie in cash or otherwise)?
(f) What would be the costs of this remedy?
(g) How might such a remedy best be implemented?
OPTION 6 ANNUAL STATEMENT OF COST AND A REMINDER OF THE CUSTOMER’S RIGHT TO CANCEL AND EARLY SETTLEMENT TERMS
26. The CC is considering whether distributors should be required to provide a statement every 12 months from the date of purchase detailing the annual and lifetime cost to the consumer of the PPI policy and containing a reminder of the customer’s right to cancel the policy and to switch PPI provider, the existence of alternatives and, in the case of single premium policies, a reminder of the early settlement terms. This state-ment could be provided along with the CCA 2006 statement.6 This could raise awareness of customers’ ability to switch PPI provider, enhancing the effectiveness of other measures aimed at directly reducing switching costs.
27. The CC invites views on the following questions:
(a) Would supplying the PPI statement alongside a CCA 2006 statement be appropriate?
(b) How should information be presented to ensure that it is prominent and in easy-to-understand language?
(c) How should the reminder of the right to cancel be worded to maximize its effectiveness?
(d) How might such a remedy best be implemented?
Option 7 Remedies to address problems with single premium policies
28. The CC found that the rebate structure and other fees for early termination of single premium policies create switching costs. As a result, the CC is considering the following three options:
(a) Prohibiting distributors from offering single premium policies. Regular premium policies could be developed to insure those credit products, such as personal loans, which are currently insured using single premium PPI. This remedy would reduce switching costs associated with single premium PPI, and would increase comparability between PPI products, including with the products offered on a stand-alone basis, which are normally regular premium policies.
(b) Introducing an additional choice at the point of sale of single premium policies. Under this remedy, distributors of single premium policies would be required to offer a regular premium policy with an identical level of cover as the single premium policy they offered. The only difference between the policies would be the way the customer pays for the policy (ie in regular instalments in the case of the regular premium policy and in a single upfront payment financed by the provider and on which interest is charged, in the case of the single premium PPI policies).
(c) Requiring that single premium products offered by distributors at least meet minimum terms for early settlement rebates and any additional charges. This remedy could reduce the financial costs to customers of switching PPI providers.
29. Option 7(a) is an alternative to Options 7(b) and 7(c), in that if Option 7(a) were taken, then Options 7(b) and 7(c) would be redundant. Options 7(b) and 7(c) are not mutually exclusive and we are considering them individually and as a combination.
30. The CC invites views on the following questions:
(a) Which option or options would be the most effective at addressing the market features and resulting consumer detriment associated with single premium policies?
(b) What costs would be associated with each option?
(c) Are there consumer benefits associated with single premium policies which the CC should take into account?
(d) Would prohibiting single premium policies or restricting their sales cause any harm to consumers moving to regular premium policies?
(e) How could the equivalence between single and regular premium policies under Option 7(b) be defined and monitored, and would customers value having this choice at the point of sale?
(f) What principles should be applied when determining a minimum standard for early settlement terms and the levels at which minimum standards should be set? For example, should minimum early settlement rebates be set on a pro-rata basis or is there some other approach which would adequately address switching costs?
(g) How might such a remedy best be implemented?
OPTION 8 MINIMUM STANDARDS FOR ELEMENTS OF PPI POLICIES THAT ACT AS A BARRIER TO SWITCHING (INITIAL EXCLUSION PERIODS AND PRE-EXISTING CONDITIONS QUALIFICATION PERIODS)
31. The CC is considering whether PPI distributors should be required only to offer PPI products which meet or exceed minimum standards for the following characteristics:
(a) initial exclusion periods (ie the period of time after inception during which cus-tomers are not allowed to make any claims); and
(b) pre-existing conditions qualification periods (ie the period of time after inception during which customers are not allowed to make claims in relation to conditions existing at the time the policy was taken out.
32. The CC invites views on the following questions:
(a) What would be an appropriate minimum standard (ie maximum allowable exclu-sion or qualification period) for each characteristic?
(b) Should the same minimum standards apply to all PPI products, including stand-alone PPI and short-term IP?
(c) How might any such remedy best be implemented?
OPTION 9 OBLIGATION TO SHARE INFORMATION ABOUT CUSTOMER CLAIMS
33. The CC is considering a remedy whereby information about a PPI customer’s claims history could be transferable between PPI providers, when a customer switched to another PPI provider. This remedy would enable providers to offer a discount to cus-tomers who have made few or no claims, encouraging customers to switch providers.
34. The CC notes that the no-claim bonuses found in other type of insurance, such as motor insurance, are dependent on claim transparency between providers. This remedy would reduce switching costs for customers and would also lower the barriers to customer acquisition for new PPI providers.
35. The CC invites views on the following questions:
(a) How could a system for sharing information be designed and operated in order to be effective?
(b) How would this remedy work for single premium customers?
(c) Would the interests of customers be improved or harmed if their claims history were shared with other providers?
(d) Should this obligation apply to stand-alone PPI, as well as other PPI policies?
(e) How might such a remedy best be implemented?
OPTION 10 OBLIGATION TO SHARE INFORMATION ABOUT CUSTOMER’S CREDIT CARD BALANCE WITH A NOMINATED UNDERWRITER
36. The CC is considering imposing obligations on CCPPI distributors to facilitate the provision of CCPPI on a stand-alone basis. Distributors would be required either:
(a) where the customer expressly informs the distributor that (s)he chooses to have stand-alone PPI on a particular credit card, to then share information on the customer’s credit card balances with stand-alone providers in certain circum-stances; or
(b) to calculate the monthly premium based on the customer’s balance (and the stand-alone provider’s fee) and then pay it to the stand-alone PPI provider from the customer’s credit card balance.
37. In its provisional findings, the CC found that access to consumers’ credit information creates switching costs for customers of CCPPI. It also creates barriers to customer acquisition for stand-alone providers and hence barriers to entry. We consider that this remedy would allow any PPI provider to offer a CCPPI product whose level of cover is linked to the balance outstanding on the card at each point in time, in con-trast with the current situation where only the incumbent credit card provider can offer a CCPPI product with a level of cover linked to the outstanding balance.
38. The CC invites views on the following questions:
(a) What information should be shared between credit card and PPI providers and with what frequency?
(b) What would be the most effective approach to support timely and safe sharing of information?
(c) Should information be shared between the credit card and the PPI providers direct or through an independent third party?
(d) What would be the costs of providing such information to a stand-alone PPI provider?
(e) How might such a remedy best be implemented?
MEASURES DIRECTLY TO ADDRESS CONSUMER DETRIMENT ASSOCIATED WITH HIGH PPI PRICES
OPTION 11 PRICE CAPS
39. The CC is considering the imposition of price caps on PPI. Such a cap would be imposed for a limited period in parallel with some of the remedies outlined above.
40. The CC found that, as a result of the features it identified, PPI prices are higher than they would be in a competitive market.
41. The CC’s preference in developing remedies is to adopt measures which directly address competition problems at source,8 rather than remedies which control outcomes, such as price caps. However, there is a risk that the measures set out above, whether alone or in combination, may not act sufficiently quickly on their own in addressing the identified AEC and resulting detrimental effects. A price cap may be able to bring prices closer to competitive levels more rapidly, directly reducing consumer detriment, while other measures took effect.
42. The CC invites views on the following questions:
(a) Which forms of PPI, sold by which distributors and/or intermediaries should be covered by any cap?
(b) How should any price cap be designed? For example:
(i) should a cap be applied to individual products; or
(ii) should a cap be set on the price of PPI relative to the benefits received by customers across a range of the PPI products offered by a particular supplier?9
(c) At what level(s) should any cap should be set, and on what basis should a cap be based (eg by reference to the claims ratio)?
(d) How long should a price cap remain in force (eg three years)?
(e) Should new products also be subject to any cap? If not, for what length of time should distributors be required to continue to provide existing capped products?
(f) What measures would be needed to reduce the risk that any price cap could be circumvented by product redesign or other means?
(g) Whether, and to what extent, such a cap would enhance or impede the effectiveness of other remedy options.
(h) Should there be a staged reduction in price, a step change, or both? If both, what should the balance be between the step change and the year-on-year reduction?
(i) How could such a remedy best be implemented?
OTHER POSSIBLE REMEDIES
43. The CC will consider any practical alternatives to the possible remedies outlined above that the parties to the inquiry or other persons would like to propose which they consider would appropriately address the AEC identified or the resulting detrimental effects.
THE SCOPE OF REMEDIAL ACTION
44. The CC currently considers that any remedies it chooses should apply to all providers of the types of PPI for which we have provisionally found an AEC,10 unless specified in the individual remedy option.
NEXT STEPS
45. A copy of this notice will be posted on the CC’s website. The parties to this inquiry and any other interested persons are requested to provide any views in writing, including any additional or alternative remedies they wish the CC to consider, by 30 June 2008.
PETER DAVIS
Group Chairman
5 June 2008 |
| ID: |
41355 |
| Author(s): |
SCR |
| Publication date: |
05/06/08 |
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Created: 05/06/08. Last changed: 05/06/08.
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