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PPI market investigation - emerging thinking

COMPETITION COMMISSION News Release (62/07) issued by The Government News Network on 6 November 2007

The Competition Commission (CC) has today published a consultation document inviting views on its current thinking on the nature of competition in the payment protection insurance (PPI) business in the UK.

This document sets out the CC's emerging thinking on competition in the supply of all PPI (except store card PPI) to non-business customers in the UK on the basis of evidence analysed to date, as well as identifying areas where it is seeking additional evidence and the issues on which it intends to concentrate in the period prior to the planned publication of its provisional findings in May 2008.

Inquiry Chairman and CC Deputy Chairman, Peter Davis, said:
After examining a substantial amount of evidence, we think there are some areas that we need to explore further. We are far from making up our minds, but we are focussing on the amount of competition for PPI that distributors face at the retail level. It is clear that the decision of whether or not to take out PPI is an important one and that customers must balance the benefits of insurance against its cost. The evidence we have seen suggests that the cost of PPI is in some instances higher than the interest paid on loans.

At the retail level the initial indications are that consumers buying a distributor's credit product are relatively price insensitive when they consider buying PPI, and that the competitive constraints from alternative products such as income protection are limited. If that is the case then distributors might face little substantive competition when supplying PPI to those people who buy the distributors' own credit product. We are currently running a major survey aimed at understanding consumer behaviour and our collection and analysis of evidence from the parties is ongoing. This work will help us understand the extent and nature of competition for PPI at the retail level.

In the course of our inquiry, it has been put to us forcefully that the supply of credit is itself highly competitive and that distributors compete to attract customers, some of whom will go on to buy PPI. At the moment our evidence base appears to suggest that there are separate markets for PPI and credit, but our survey and ongoing analysis of the parties' data will help us make an informed judgement about this very important and challenging issue.

We have also considered two other fundamental issues. First, we considered whether we should be concerned about the extent of competition between underwriters. Second, we considered whether vertically-integrated companies, companies which operate at both the underwriting and distributing levels, distort competition. Given the evidence we have seen to date we do not currently propose to undertake further analysis or inquiry into these areas.

We are well aware of the concerns surrounding PPI and the importance and size of the industry-several billions of pounds in premium are paid every year. We aim to conclude our work as speedily as possible, but we are also conscious that the issues we are deciding upon are by no means simple and it is vital that we carry out our work thoroughly, ensuring that all parties receive a fair hearing.

As the industry regulator, the FSA has the lead on consumer protection issues, and continues to take action to address concerns such as mis-selling. Our focus is on the bigger picture, examining whether there is effective competition, delivering value for consumers. The main purpose of publishing today's document is to share our emerging thinking on some of the key issues and invite further evidence to help inform our inquiry.

The CC is continuing to work closely with the Financial Services Authority (FSA) to ensure that both organisations pay appropriate regard to ongoing work in the area. The CC for example is paying close attention to the FSA's work relating to selling standards and ensuring that customers are treated fairly, as well as various industry initiatives in response to the FSA's work.

As well as the emerging thinking document, the CC has today also published nine working papers and the results of a qualitative survey of PPI customers which was conducted on behalf of the CC by BMRB in July 2007. The CC is also anticipating publishing the results of a telephone survey of PPI customers, conducted by BMRB, in December 2007. All the publications are available at: http://www.competition-commission.org.uk/inquiries/ref2007/ppi/index.htm

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 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 inquiry team has so far visited 11 suppliers of PPI (including both underwriters and distributors), and held hearings with 27 interested parties. Non-confidential versions of the key views of those who have given evidence to the CC have been published on the website along with other submissions.

The statutory deadline for the inquiry is 6 February 2009, although the inquiry group aims to complete its investigation more quickly than that.

The CC would like to hear views on the emerging thinking document from all interested parties, in writing, by 27 November 2007. 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. 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.

3. 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.

4. Following such a reference, the CC carries out a comprehensive investigation, so that it can ultimately come to a final judgement about whether any features of the market prevent, restrict or distort competition and, if so, what action might be taken to remedy these.

5. 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.