Loan insurance: Payment protection profits over 900%
Banks' 982% PPI profit
Wednesday, 30 Jan 2008 09:51
UK banks are making profits of up to 982 per cent on payment protection insurance (PPI) policies sold with loans.
A report by the Competition Commission (CC) reveals UK lenders make as much as £2.6 billion a year from PPI.
The average revenue from a single premium personal loan PPI policy for banks is around £1,200.
The watchdog found it was cash earned from PPI that has helped personal loans remain profitable for banks.
The CC working paper 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."
Tim Moss, head of loans at moneysupermarket.com, explained the finding could lead the way back to "old fashioned" banking when loan rates were higher but there are fewer 'add-on' products.
"Lenders may have to go back to the days where they made their money out of the interest rate they charged, rather than the additional products they sell," he said.
"There will be more transparent pricing, but market-leading loans could well go from six or seven per cent up to eight or nine per cent, if PPI is clamped down on.
"Rates would have to go up to replace lost profits."
Meanwhile research by the Post Office found PPI linked to a loan costs five times more than standalone policies purchased independently – an average saving of £705.
Post Office head of protection products, Duncan Caesar-Gordon, said: "Many customers continue to have little understanding of PPI and some do not even realise they have this insurance in force.
"Others, who have been at the hands of aggressive sales tactics, can feel they have no choice but to take the expensive policy tied to a loan or credit card if they want their application to be accepted.
"If we want customers to trust our industry, these aggressive sales tactics must cease to allow for a more transparent and fairer marketplace."
The Post Office found average monthly PPI premiums stood at £28.05 – or £14.88 for every £100 of cover – compared with its own standalone cover costing £8.47 on average.