The announcement that the Office of Fair Trading (OFT) had referred its investigation into the payment protection insurance (PPI) market to the Competition Commission (CC) has met with a decidedly mixed response from the mortgage industry.
There are some notable champions of the CC’s involvement while others, including AMI, were disappointed that the mortgage payment protection insurance (MPPI) sector was also included in the referral. We at AMI still hold the belief that the MPPI market is unique when compared to those other PPI sectors also reviewed by the OFT – secured loan PPI, unsecured loan PPI, credit card PPI and store card PPI, which have been excluded from the investigation. Given the huge importance of brokers in this sector, many feel it should have been kept out of any referral. This was not the decision taken and we must now work with the CC to provide them with information on the market and the role of our members in it.
There was another group who greeted the news of the referral with a certain degree of satisfaction – they were of the opinion that the lengthy nature of CC investigations meant they could, for want of a better phrase, ‘continue to fill their boots’ before any action was taken in two years time. Their belief being that the market would be able to stay ‘as is’ until the inquiry was completed allowing them to continue to make huge profits, at least until February 2009, and possibly beyond as the CC would also have to consider remedies to any adverse effects on competition.
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The CC’s recently published ‘Statement of Issues’ may slightly deflate those of the opinion that the PPI sector is ‘safe’ for a couple of years. The statement ‘identifies the specific questions and areas the CC believes are relevant in deciding whether any feature of the markets for PPI products restricts, distorts or prevents competition. It will be used as the basis to guide collection of evidence including the first round of hearings with interested parties during the period May to July 2007’.
What the ‘Statement of Issues’ also tackles is the statutory deadline for the inquiry which is currently set at 6 February 2009 – the inquiry group charged with this investigation explicitly state that it ‘aims to complete its investigation more quickly than that and expects to publish its next publication – the ‘emerging thinking’ document – in the Autumn’. This is a lot quicker than many in the industry were expecting and is no doubt partly to do with the ongoing work of the Financial Services Authority (FSA) into PPI sales and advice standards. Indeed, the CC makes reference to the close work between the OFT and the FSA on PPI matters, and we should continue to expect an integrated timetable between the two.
Additional questions
So, what else does the ‘Statement of Issues’ cover? Well, it poses additional questions that will be raised if it finds features of the PPI market that do affect competition. Questions such as:
- Whether action should be taken to remedy, mitigate or prevent the adverse effect on competition concerned or any detrimental effect on customers, and if so what those actions should be; and
- Whether it should recommend the taking of action by others for the same purpose and if so, what those recommendations should be.
The CC investigation is also interesting because it will re-cover areas that the OFT’s market investigation has already looked it – namely it will look again at PPI product definition and the distinct PPI sectors that the OFT defined.
The assessment of the extent to which competition is adversely affected may bring up various features such as ‘the structure of the market, the conduct of firms whether as sellers or buyers, or the conduct of the customers’. It will consider both the retail and wholesale markets, and in the investigation will look at ‘the nature of demand and the costs and competition between providers at each stage of production.
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Within its retail consideration the CC will consider customer demand for PPI, the retail costs of providing PPI, competition between retail providers of PPI and any barriers to entry and expansion. In its wholesale consideration it will again consider ‘customer’ – lenders and other firms who distribute PPI – behaviour, wholesale costs and again the competition between wholesalers.
Importantly for our market, CC have confirmed that it will consider ‘what role, if any, brokers play in competition affecting the supply of PPI in either the retail or wholesale markets’. It will consider other indicators of the extent of competition which may include prices, profitability, indicators of customer behaviour and international comparisons.
This continued focus on PPI from both the FSA and now the CC will be a major presence in the market throughout this year and into next. AMI is providing members with information on their PPI sales and advice standards and is also feeding into the CC’s collection of evidence and will be taking part in its first round of hearings. This is one investigation which will define where the PPI market goes next and it is vitally important that your trade body puts your point of view across to the CC. If you have any comments to make, please do contact us.
