Customers should no longer be able to buy Payment Protection Insurance (PPI) at the same time as taking out a loan or credit, according to the Competition Commission.
Instead, banks, mortgage companies and credit card providers should face a two-week wait before they can contact their customers about buying a PPI product.
The proposal is one of several contained in a consultation paper published by the competition watchdog today.
PPI covers repayments due on credit products if the borrower cannot afford to pay because of an accident, sickness, unemployment or death. The proposals form part of a package of remedies intended to increase competition and reduce prices in the PPI market.
There are over 13 million PPI policies in the UK. The vast majority of these were sold alongside and at the same time as personal loans, credit cards, mortgages and second mortgages. According to the Competition Commission, this gives distributors a 'point-of sale' advantage, making it more difficult for other providers to reach those customers and discouraging customers from shopping around for a better deal.
The Commission has been investigating the PPI market since February 2007. Reporting on its provisional findings last June, it concluded that distributors of PPI products faced little or no competition when selling PPI to their credit customers, with the result that many customers were being overcharged.
The Commission's proposed solution is to remove the 'point-of-sale advantage' altogether by preventing the distributor from actually selling a PPI product to a customer for 14 days after the credit sale to that customer, although it may provide the customer with a quote. The customer can then shop around during the 14-day period, or he may decide of his own accord to approach the distributor after 24 hours and buy the PPI.
The Commission would also ban all PPI products that are paid for by a single premium because it believes they act as a barrier to customers switching to another provider.
It has, however decided against its earlier proposal to introduce a price-cap on PPI products, hoping instead that its measures to increase competition will naturally result in lower prices.
Other proposed remedies include requiring credit providers to give customers a 'personal PPI quote' setting out the cost of the PPI policy on its own and when added to the credit product. Customers who buy a PPI product would also be sent an annual statement to encourage them to review their cover and decide whether or not to switch providers.
Advertisements for PPI products would have to include the price expressed in a common format (monthly cost per £100 of monthly benefit) and reminders that PPI is optional and available from other providers.
All PPI providers would also be required to provide information to the Financial Services Authority for inclusion in the FSA's PPI price comparison tables and to the Office of Fair Trading on compliance.
Nick Starling, Director of General Insurance and Health at the Association of British Insurers, said the Commission was making a mistake in trying to ban point-of-sale PPI.
“This is devastating news for consumers. By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong," he said. "Unemployment claims on PPI policies have grown by 69% in the last twelve months, showing just how valuable this cover is proving to be."
“The Competition Commission still has the opportunity to rethink its proposals before publishing its final report in January. It is essential that it does so," he said.
"We understand that poor sales practices are never acceptable and we will continue to work with the Commission to resolve the outstanding issues in the PPI market. However, if the Commission continues down this path it will kill the PPI market altogether, leaving millions of consumers with no protection at all,” said Starling.
Alan Davis, competition partner at Pinsent Masons, the law firm behind OUT-LAW.COM, said:
"Prohibiting the sale of PPI at point-of-sale in the way the Commission has proposed will create enormous confusion for customers and will discourage customers from taking PPI at all. What will a customer think if a credit provider says 'Here is a quote for PPI which is a valuable product but I am legally prohibited from selling it to you at the moment?'"
"A cooling-off period following the sale (which already exists under FSA rules) combined with enhanced consumer information about switching and comparison tables would be more than sufficient. Nevertheless, the fact that the Competition Commission has steered away from price caps is to be welcomed," he said.
Peter Vicary-Smith, Chief Executive of the consumer organisation Which? welcomed the proposals.
"This is a huge victory for consumers who have often felt pressured into buying expensive and inadequate PPI products," he said. "The Competition Commission has listened to the consumer voice and has taken decisive action."
“Single premiums trap people into poor value products that are difficult to get out of, but by staggering the payments, consumers will have more control. This sounds the death knell for shoddy protection and is a wake up call to the industry to develop useful products that consumers actually need,” said Vicary-Smith.
The Competition Commission has asked for comments on its package of remedies by 4th December 2008.