PPI revenue kept personal lending profitable

by Gill Montia

Story link: PPI revenue kept personal lending profitable

The Competition Commission has published details of its investigation into payment protection insurance (PPI), in which it claims that the lenders who sell the insurance can earn £1,200 on a policy that can cost only £20 to sell.

The Commission’s investigations follow complaints from consumer groups that PPI is expensive, unnecessary and difficult to claim.

The report estimates that the total revenue from PPI in 2006 reached £2.4 billion, while profits reached £1.4 billion.

Sales commission rates on PPI sold alongside loans and credit card agreements range from between 50% and 80% and the Commission is suggesting that the profitability of the personal loans sector has been heavily supported by PPI sales since 2006, although credit card and mortgage markets have been less reliant on income from this source.

The report states: “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 sale of PPI was referred to the Competition Commission following a two year investigation by the Office of Fair Trading and a final ruling is expected this summer.

The FSA is also conducting an investigation into whether the sale of PPI conforms to regulations on treating customers fairly.