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PPIs 'exploit customers', research finds

The sale of payment protection insurance with personal loans has led to the exploitation of customers, according to research carried out by Newcastle University.

A joint study by the Business school and the University of East Anglia found that over a 10 year period banks subsidised the cost of personal loans by offering over-priced payment protection insurance (PPI).

Commenting on the findings, study author Dr John Ashton from the ESRC Centre for Competition Policy said consumers were becoming aware of concerns with credit insurance but there was still a need for improved financial information.

He said: “Clearly some firms are exploiting customers far more than others.

“The de-regulation of financial services and subsequent joint provision of insurance and banking services has had adverse results for consumers. They can feel pressurised into taking out PPI and don’t often realise they can shop around.”

Concerns have been raised about uncompetitive pricing and the possiblity of policies being misleading.

The study used monthly data from financial information provider Moneyfacts and covered a 10-year period from January 1998 to December 2007, based on the cost of a £5000 personal loan with and without PPI.

On average the monthly costs of a £5000 personal loan with PPI was £186.75 and £162.37 without. These costs also changed over time, with the monthly cost of a £5000 personal loan without PPI being £173.14 in 1998, falling to £158.32 in 2007.

However the costs of PPI have been less flexible, with the average monthly PPI cost being £25.73 in 1998 and £24.97 in 2007.

Co-author Prof Robert Hudson, Professor of Finance at Newcastle University Business School, added: “In light of our findings it is important for customers to search a wide range of financial services providers before undertaking any financial commitments.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .