大象传媒

The credit insurance rip-off

• Robert Peston
• 5 Jun 08, 11:31 AM

A culture in our banks of taking unfair advantage of ill-informed and unconfident borrowers has been exposed by the .

Our biggest banks can take no pride in the provisional findings of the Commission's review of the sale of credit insurance to cover the risks that we won't be able to keep up payments on personal loans, credit-card debt and mortgages.

That said, I have doubts about the way that the Commission has equated profit in excess of cost of capital with overcharging - and on that basis says consumers are being ripped off to the painful tune of more than 拢1.4bn.

But the evidence is clear. Competition in the market for "payment protection insurance" is inadequate. And the distributors of this stuff are making excessive profits from it.

It is absurd that in two-thirds of personal loans covered by this insurance, the annual cost for the consumer of the insurance is the same or greater than the cost of servicing the debt.

That implies either that the banks are making no provision for the risk of default when setting the interest rate, which seems unlikely. Or the cost of the insurance is wholly disproportionate to the risks it is supposed to cover.

The Commission is careful not to make allegations that particular banks are sharper operators than others.

But it does point out that the distributors with the largest share of this market are , and .

So should we just say hooray and assume that consumers can look forward to a better deal?

I would be slightly cautious about the consequences for borrowers.

The Commission has come up with a series of possible remedies, whose aim would be to generate proper competition in the provision of this insurance that would drive down prices.

It has even mooted a temporary price cap.

However there is bound to be an element of cross-subsidy between the excessive profits banks charge for this insurance and what they charge for personal loans and mortgages.

Removing that cross-subsidy could lead banks to increase the explicit costs of credit.

Note also that in our decelerating economy the risk of lending for banks has risen - and they are already charging most of us more for loans.

So something has got to give, on the assumption that the Competition Commission succeeds in slashing what the banks receive from insuring us against the risk of default at a time when the risk of default is rising fast.

That something would either be a further sharp contraction in the amount of credit banks make available or a further sharp rise in the interest and other charges on what little credit is offered.

Ouch.

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