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Home Page | News | Banks make 900% selling PPI

Banks make 900% selling PPI

Posted on Wednesday, 28 January 2009 09:44AM by

The massive profits made from selling controversial loans insurance have been exposed by the Competition Commission.

The watchdog has revealed that lenders selling payment protection insurance (PPI) could expect a return on their costs of 982%. Put another way, they can earn £1,200 from a policy that costs £20 to provide.

The Commission said that banks made between £2.2bn and £2.6bn a year from PPI.

PPI is meant to cover repayments on loans, mortgages and credit cards if the borrower suffers a loss of earnings because of accident, sickness or unemployment. But it has been shown to be hugely expensive and very limited in the cover it provides and frequently sold to people who cannot claim on it.

The Commission is investigating the market for PPI after the Office of Fair Trading decided there may be evidence of an uncompetitive market that disadvantages consumers.

In a working paper released yesterday the Commission said the costs of providing PPI were roughly less than 5% of the total amount taken in income. The huge profit margins on PPI mean banks and other lenders have come to rely on the insurance to bolster the income earned from loans. In fact, they would make no money from selling personal loans if they did not push customers into taking out PPI at the same time, said the Commission.

Its report stated: 'The personal loans business has suffered from declining profits in recent years to the point where in 2006 it appears to have been loss making before taking into account income from PPI. With PPI included, the sector appeared to have been marginally profitable.

'This appears to be a recent phenomenon: the evidence suggests that prior to 2005, the personal loans sector was profitable, even without PPI income.'

The report added: 'When viewed as an add-on product, PPI distribution is highly profitable. Distributors earn a high proportion of the total income from PPI premiums and in comparison the additional costs incurred in selling PPI are low.'

(Ed Monk, 28th January 2009. www.thisismoney.co.uk)

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