OFT investigates payment protection insurance

The lucrative payment protection insurance offered by banks and credit card companies will be investigated by the Office of Fair Trading, it announced today.

Financial services companies make more than £5bn annually selling PPI alongside mortgages, credit cards and loans and up to 7m policies are taken out each year.

The insurance covers borrowers if they lose their job or become sick and unable to work.

However, last September the charity Citizen's Advice claimed that it was being sold to people who were ineligible to make a claim or later found that their circumstances were excluded.

A super-complaint, made by the charity to the OFT, said consumers were paying too much for the cover and often fell victim to unfair sales tactics.

In December, the OFT responded to the complaint, saying it had identified that the sector was not working well for consumers.

It was particularly concerned that consumers were not being told they could shop around, that the information they were being given was too technical and that the profit margins for providers appeared high.

As well as investigating those issues, the study launched today will consider the relationship between PPI providers, customers' experiences of making claims and their awareness of the exclusions on different policies.

The OFT will consult with the industry and consider studies of PPI by the Financial Services Authority and the Competition Commission, which has investigated sales of PPI for store cards.

It expects to publish its report by the end of the year. If the OFT finds evidence of mis-selling or profiteering in the sector, it could recommend that the government take action or refer the industry to the Competition Commission.

Last year, the price comparison website uswitch.com published research that showed PPI from a loan provider could more than double the cost of the loan.

Cheaper, standalone policies are available, but according to the OFT's initial findings, the complexity of PPI policies mean people are much less likely to shop around for cover as they do when they take out a loan.

Emma Bandey, spokesperson for the consumer group Which?, welcomed today's announcement. "Which? has been saying for many years that the PPI market is seriously flawed.

"There are problems with how the products are sold and how the market itself is set up so we are pleased that the OFT will be conducting this study and look forward to contributing our evidence."

Q&A: payment protection insurance