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Payment protection insurance: regulators should focus on consumer education

12th December 2005
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The Office of Fair Trading (OFT) has announced a study into the payment protection insurance (PPI) sector to check whether customers are given a fair deal. A clear market exists for PPI, and the OFT needs to ensure that best practice selling is applied across the sector as a whole, while consumers' understanding of the product should be another area of regulatory focus.

The OFT's probe covers payment protection insurance on loans, credit cards and mortgages. This comes as a response to a super-complaint filed by Citizens Advice in September. PPI is criticized for being too expensive and for excluding many common causes for credit default. Mis-selling is also wide-spread with the consequence that many policy holders are ineligible to claim on their policies.

The FSA, which regulates the PPI sector, undertook its own review this year and reported poor levels of compliance with its regulations. It also found that consumers suffer under a lack of disclosure of the product's real price and cover limits.

If the OFT draws the same conclusions as the FSA and Citizens Advice it is likely to lead to measures being taken to combat problematic practices, which will almost certainly squeeze the currently very high profit margins seen in the PPI sector. Moreover, the negative publicity surrounding PPI may also lower consumer confidence in the product, thereby hurting sales.

In defense of the industry it should be pointed out that there is a genuine market for PPI as many consumers are worried about being able to meet repayments on their loans. The FSA however is rightly advising people to consider whether a PPI is the right solution for them, to shop around for the best price and to make sure that they receive cover appropriate for their needs, which suggests that suitable PPI products can be found.

Indeed, the FSA says that compliance standards are generally higher in relation to PPI sold on mortgage repayments, and on this basis, the OFT investigation needs to focus on spreading this kind of best practice across the sector overall. At the same time however, regulators need to ensure that consumer awareness and understanding of PPI as a concept is enhanced as a result of their investigations.

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