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Home | News & events | Legal updates | Competition Commission reaffirms PPI ban at point of sale of credit
Competition Commission reaffirms PPI ban at point of sale of credit
26 May 2010
On 14 May 2010, the Competition Commission (CC) published the provisional decision on its proposed ban of payment protection insurance (PPI) at the point of sale of credit (the point of sale ban).
It is in light of a legal challenge brought by Barclays Bank plc (Barclays) and others in October 2009. The CC has reaffirmed the point of sale ban for all forms of PPI except for retail PPI (PPI sold with retail credit accounts) where the CC cannot yet conclude that it should require the introduction of point of sale ban.
The provisional decision stems from an Office of Fair Trading (OFT) referral of the supply of all PPI (except store card PPI) to non-business customers in the UK to the CC for investigation in February 2007.
In its report published on 29 January 2009, the CC found an adverse effect on competition (AEC) in markets for PPI and decided on a package of remedies, including a prohibition on selling PPI at the same time as credit.
Barclays challenged whether there was an AEC and more particular the lawfulness of the point of sale ban. The Competition Appeal Tribunal, in its judgment published on 16 October 2009, was against Barclays on the AEC issue.
However, it found that the CC had failed to take into account the loss of convenience to consumers which would flow from the imposition of a point-of-sale ban.
The CC’s decision to include the point of sale ban in its remedy package was quashed and remitted to the CC for reconsideration in accordance with the principles set out in its judgment. Importantly, the Tribunal stated that the decision did not mean that the CC could not, as part if its reconsideration, decide to include the point of sale ban in its remedy package.
As part of its reconsideration, the CC looked again at whether there was still an AEC in light of the recession and action that was taken by the Financial Services Authority in 2009 to ensure firms cease to sell single premium PPI with unsecured personal loans and to ensure that some firms and trade bodies refund Mortgage PPI to customers by 2010.
Despite the significant downturn into the volume and value of PPI sales as a result of these events, the CC found that the four features of the PPI market which led it to originally conclude that there was an AEC (i.e. the failure to compete, barriers to search, barriers to switching and the point of sale advantage) still remained. In particular, the CC saw:
- no indication that intermediaries and distributors where actively seeking to win customers from rivals
- no changes to the way information was presented to customers
- no increase in switching rates
The loss of convenience to consumers if the point of sale ban is implemented is dealt with at length in part 7 of the provisional decision. A number of PPI providers and distributors had argued that customers would not buy PPI unless encouraged to do so at the point of sale and that many customers would not buy PPI later even if prompted and they genuinely intended to buy PPI. Evidence provided to support this proposition included experiments, internal estimates and survey evidence.
However, the CC concluded that whilst the evidence submitted does suggest that a split in the sales process might lead to some reduction in sales of PPI if nothing else changes, the evidence did not show the direct impact of convenience on sales. It further concluded that evidence of a reduction in PPI take up is not necessarily evidence of a loss of convenience.
The CC felt that there may be other reasons for the reduction in sales (for example, some customers may, after a period of reflection, decide that they did not want or need PPI). Therefore, the CC felt that PPI providers and distributors were overstating the loss of convenience.
As a result of its further investigations, the CC has therefore provisionally concluded that:
- the remedy package originally put forward by the CC was no more onerous than needed to achieve the aim of remedying the AEC, and that there were no other equally effective packages
- the benefit to consumers from the introduction of a point-of-sale prohibition for all forms of PPI, with the exception of retail PPI, by introducing greater competition and choice and lower prices to the market, will outweigh disadvantages, such as the potential for higher credit prices and the potential inconvenience to some customers
- it could not yet conclude that for retail PPI the point of sale ban would be proportionate. It is inviting comments on whether alternative remedies would be more effective or would deliver equivalent benefits at less cost in the retail PPI market
Whilst these conclusions are disappointing for the finance and insurance industries, they are not entirely unexpected, as the hurdle that the CC had to overcome following the Tribunal’s decision did not look insurmountable.
The finance and insurance industries are therefore going to have to be more innovative in providing credit protection to meet the needs of their customers in these increasingly turbulent times.
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Paul Estlin
Associate
T: 03700 86 5667
I: +44 (0)161 954 5667
E: paul.estlin@shoosmiths.co.uk