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PPI Ban Will See Rates Increase

Moves to ban the sale of insurance alongside credit agreements in 2010 has been welcomed by campaigners.
However, experts have warned that this could mean further increases in loans and mortgage rates.

The Competition Commission, in its final report into payment protection insurance (PPI), announced a ban on the selling of PPI at the point of sale.

The charging of a one off upfront fee for the insurance was also banned. The reason this practice has been so heavily criticised is because lenders were adding the premium to the loan and then adding interest on top.

PPI was designed to cover repayments for loan, mortgages or credit-card if borrowers fall ill, have an accident or lose their jobs. The watchdog said it should not be sold to a customer within seven days of them taking out a credit agreement.

Measures were also announced by the commission which should make it easier for customers to shop around and switch providers.

“The ‘point-of-sale’ advantage has meant that leading providers have faced little competition for PPI and, as a result, have charged persistently high prices,” said Peter Davis from the Commission.

“Competition will provide consumers with lower prices and better choice.” However, campaigners are concerned that this could in turn put up the cost of borrowing.

“At a time when the banking sector is already in turmoil, the last thing lenders wanted was to lose that lucrative income stream,” said Andrew Hagger, a loans adviser.

“The worry is that some of the profit lost from PPI sales may be reclaimed in the form of higher interest rates being charged on personal lending products. Many lenders subsidised lower interest rates with PPI income commission.”

New figures from Moneyfacts show that in just 18 months loan rates have already jumped up 3.4 per cent. Smaller loans have seen the biggest increase, with the average rate on a 1,000 pound loan today starting at 19.8 per cent, while the average on a 5,000 pound loan has jumped to12 per cent.

Just a few years ago, the battle between lenders was fierce and rates as low as 5.4 per cent were available, but now the lowest rate is 7.8 per cent and you have to be a homeowner to get this deal. The PPI ruling could now lead to lenders pushing rates up even higher.

Late last month, several high street banks announced they would cease selling single premium PPI. However, some campaigners are not convinced by their motives.

Although some banks have already withdrawn single premium policies, it could be because they are safe in the knowledge they have already protected their margins by steadily increasing loan and credit-card rates.

Due to current economic downturn, the Association of British Insurers (ABI) stressed the importance of cover and said its figures showed a 118 per cent increase in unemployment claims on PPI policies last November, compared with the same month of 2007.