I was having a chat recently with a senior
banker, in fact one of the biggest bankers I know, about the
legislative changes proposed by the competition commission
concerning the methods of sale of payment protection insurance
(PPI) in all primary and tertiary markets.

He was telling me that the Competition Commission had made it clear
that one of the key aspects of their findings was to unplug the
sale of PPI until after the sale and subsequent execution of a
credit agreement. He was disappointed as one of the key profit
generators for the industry had been removed from the main
transaction.

The lending industry needs PPI for three reasons.
The first is the net premium profit it represents; the second is
the perceived reduction in risk which has a clear bearing on
underwriting decisions at point of proposal and can green-light a
marginal decision by removing the ‘can’t pay’ risk element of
non-payment of the loan.

Now, every lender I know will deny this
strenuously, and I have my tin hat on ready for the phone calls and
emails, but the basic fact of the matter is this: A marginal loan
with no PPI represents maximum risk for minimal yield in a
rate-sensitive market. Conversely, the same marginal loan with PPI
constitutes less of a risk of non-payment, with the added sweetener
of insurance profit being made.

Is this the reason my buddy’s bottom lip is hanging
out? No, the real reason for the sulk is down to market rate
advantage – the ability to add PPI onto a loan, subvent the rate
using some of the insurance profits, and reduce the average APR
which can be used in national marketing and advertising.

The third reason the industry needs PPI is
provision, what the lenders put away ‘just in case’. If you remove
a proportion of the possibility of the loan defaulting by selling
insurance, then the provision for what may happen reduces, leaving
more to be reported as ‘profit’.

So, in summary, banks and direct lenders could add
PPI to proposals, use the insurance product profits to artificially
reduce the APR, reduce their provisions to dangerously low levels
and accept marginal deals that carry a higher innate risk and may
not have otherwise been approved.

The big question: Do you think they will roll over
and allow legislators to take their sparkly profit-making toy away
from them? Some readers will remember the banks taking four years
to write and 10 years to pass the Consumer Credit Act, a piece of
law the banks and direct lenders are almost entirely exempt from –
so what makes any of us think today that they won’t have a devious
work-around for this piece of law, passing a substantial market
advantage back to them yet again?