Watchdog sets sights on protection insurance

Sales of payment protection insurance are set to come under scrutiny after the OFT announced it would be investigating the market in the new year.

The insurance is sold with mortgages, credit cards and personal loans and is designed to cover a borrower's repayments should they fall sick or lose their job.

Most PPI policies are sold by the companies offering the loan product, although there are stand-alone providers and consumers can often save money by shopping around.

The investigation follows a "super-complaint" in September by the charity Citizens Advice, which said that the cover was often "very expensive, mis-sold to people who cannot claim on it, and designed to exclude many of the most common situations that can lead to debt".

The OFT said between 6.5 to 7.5m policies were taken out each year, and that in 2003 sales were estimated to have generated £5.4bn for the companies offering the products.

Only 15% to 20% of people have claimed on their policies, compared with 74% on motor insurance policies and 55.2% on household insurance, the watchdog said.

It said it would look at whether consumers were getting a good deal from the sector, suggesting there were a number of issues that meant this was not the case,

The investigation is set to start in early 2006 and will focus on the difficulties consumers face in getting information about policies and where they can buy them from, the barriers for entry faced by stand-alone suppliers and the wide variation in pricing.

"PPI is a complex product, often bought almost as an afterthought," said John Fingleton, the OFT's chief executive.

"Borrowers may shop around for credit, but the complex nature of PPI and a lack of choice mean that they are less likely to shop around for PPI.

"There is a high potential for consumer detriment - our study will look at whether consumers are getting a good deal or not.'

Citizens Advice said it was "delighted" the OFT was going to investigate the PPI market.

"This is a clear signal that the OFT believes there is a case to answer," said its director of policy, Teresa Perchard. "It is very good news indeed, and it marks the first step to a better deal for UK consumers.

"People buy payment protection insurance because they are looking for peace of mind. Given the scale of borrowing in the UK and the amount of money consumers spend on PPI, it is vitally important that they get a product that gives them this and meets their needs at a fair price.

"We would urge the industry not to wait for the outcome of the OFT investigation before reviewing their PPI products and making changes that will benefit consumers and give them a fair deal."

Q&A: payment protection insurance