LONDON: Regulator the Office of Fair Trading has launched an inquiry into the 5.4-billion-pound payment protection insurance market, vowing to bring in rules to discipline banks and insurance companies that have been making exorbitant profits through this instrument.
The OFT said it will make wide ranging investigations to find out whether providers of this service are exploiting the public and making excessive profits, and whether information and details on the policies are easily and lucidly available.
Payment protection insurance is meant to offer cover for loan repayments in case the people who have availed of the loan fall ill or face unemployment. There are complaints that several banks and insurers are mis-selling the policies to thousands of customers who do not need it. Charity Citizens Advice had made a super-complaint to the OFT in September last year on this account.
The OFT said its preliminary investigations had supported the need for a full-scale inquiry as several consumers had faced difficulties in shopping for the insurance and there was a wide variation in pricing across the industry.
Analysts say in some major banks and insurance companies payment protection insurance is a major source of profit — as much as 10 per cent of gross profits. Major players like Barclays, Lloyds TSB, Alliance & Leicester and Northern Rock vend these policies and derive substantial profits
The product’s high level of profits is because of the low claim levels. Independent studies have revealed that only 15 per cent of the claims get settled, as many policyholders have found that some technicalities raised by the insurance provider deprived them of the benefit. Some of the banks have been alleged to be over charging people. Comparison service uSwitch came out with damaging statistics to show that a payment protection insurance policy taken on a Bank of Scotland personal loan actually increased the interest rate from 6.4 per cent to 22.7 per cent.
The OFT expects to complete its investigations and come out with a report by the end of 2006. Based on its findings, it can recommend action against banks and insurance companies providing this insurance or even refer the industry to the Competition Commission.
The OFT said it will make use of the research done by the Financial Services Authority into payment protection insurance, which had discovered that some policies did not provide customers with a refund if they cancelled their policy early.
Citizens Advice says there are some 20 million payment protection policies in force. Nearly 7.5 million policies are taken every year.