PPI Profits Sustain Personal Loan Market

Payment Protection Insurance (PPI) has been shown by the Competition Commission to make massive profits for its sellers. The controversial insurance can make lenders a return on their costs by 982%, according to the watchdog. A policy that costs just £20 to provide could net the provider £1,200.

Banks make over £2 billion per year from PPI, which is supposed to cover repayments on mortgages, credit cards and loans if the borrower should be unable to pay due to a loss of earnings because of unemployment, sickness or accident. However, it has been shown to be expensive and limited in the actual cover it provides, often being sold to people who could not claim on it.

The Office of Fair Trading believe there may be an uncompetitive market which gives consumers a disadvantage, and the Commission is investigating as a result. Still at the working stage, the Commission says that PPI costs less than 5% of the amount taken in. Such huge profit margins from PPI mean lenders, including banks, now rely on the income to boost what they earn from loans. The Commission said that if they did not sell PPI the providers would make no money from selling personal loans.

Thus far, the report say: "The personal loans business has suffered from declining profits in recent years to the point where in 2006 it appears to have been loss making before taking into account income from PPI. With PPI included, the sector appeared to have been marginally profitable. This appears to be a recent phenomenon: the evidence suggests that prior to 2005, the personal loans sector was profitable, even without PPI income."

The report also said: "When viewed as an add-on product, PPI distribution is highly profitable. Distributors earn a high proportion of the total income from PPI premiums and in comparison the additional costs incurred in selling PPI are low."

Earlier in January the Financial Services Authority issued its largest ever fine for PPI as sub-prime loan company HFC Bank put 160,000 customers at risk of mis-selling. The fine of £1.085m was levied because staff at the bank sold PPI to thousands of loan customers, but did not make sure it was suitable for them, failing to gather sufficient information before customers bought the insurance.

Staff at the bank, part of the HSBC group, failed to meet the FSA requirements for them to explain why a policy would be suitable for a customer, and document how it could meet their needs.

In the period from January 2005 to May 2007, around 163,000 PPI policies were sold by HFC, but the bank's staff failed to keep adequate records which could show whether the sale of PPI was suitable or not.

FSA director of enforcement, Margaret Cole, said: "We are determined to see much better practice in the PPI market. We announced in September that we would be imposing higher fines for serious failings in the retail market including against firms who fall short in relation to PPI. The fine against HFC - the biggest PPI fine to date and first since our September announcement - is evidence of our determination in this area. HFC's failings put its customers at risk of buying unsuitable protection insurance and the financial impact on them of unsuitable advice was likely to be significant."

Published on February 1, 2008