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The Competition Commission has declared that payment protection insurance (PPI) should not be sold to a customer within 14 days of being sold a loan. Apparently the Commission is planning a crackdown after it estimated that £1.4bn of “excess profit” was made by the PPI in 2006.

For those who are unclear, PPI should ensure that people can still repay loans such as mortgages or credit card bills if their income falls when they lose their jobs or fall ill. However, PPI has been mis-sold in the past, with some customers unaware they were even buying it.

The sale of this insurance has been under sustained attack from consumer groups for the past three years, who have described it as little more than a “protection racket”.

The Commission has said that the vast majority of more than 13 million PPI policies in the UK were sold at the same time as a consumer would take out the loan or been given other credit. But at this point the banks, mortgage providers or credit card companies faced little or no competition, with consumers unaware they could buy PPI elsewhere.

This meant that the providers were able to charge high, even extortionate, prices.

The Commission said that the proposed 14-day window would allow customers to shop around for PPI. Customers would still be able to take the initiative and contact a loan company within 24 hours of getting a loan if they wanted PPI from that company.

It suggested that providers be offered a “personal PPI quote” that outlines the cost of taking out the insurance. It wants a ban on “single premium” policies which stop customers being able to switch, because it is, in effect, paid for upfront by adding it to the total debt.

There have also been calls for providers to make advertising clearer, to give information to the Financial Services Authority (FSA) for a comparison table and an annual report for customers helping to decide whether to switch.

However, unsurprisingly the Commission’s proposals have come under fire from groups representing providers.

“Preventing customers from buying PPI when they take out new credit will mean that many vulnerable people go unprotected just when unemployment is rising sharply,” said the director general of the Finance and Leasing Association.

He added that the loss of single-premium PPI would also result in “worse terms” for many customers. He warned that the proposals would raise the cost of credit, ignoring concerns about rising interest rates on credit cards.

The Association of British Insurers said the 14-day ban would leave “millions of consumers unprotected”. “By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong,” said the ABI.

The British Bankers’ Association said: “It is totally without conscience to encourage people to borrow without back-up. The Competition Commission has gone well beyond its remit.”

But independent PPI provider Paymentcare.co.uk, praised the Commission for the proposed ban on single-premium PPI policies, describing them as “a major obstruction” to consumers getting a fair deal. Which? believes up to two million people have rushed into buying PPI only to find that they could not claim on the policy, owing to exclusions in the small print.

The Financial Ombudsman Service (FOS) recently demanded that the FSA take action to stop banks fobbing off customers who had complained to them about PPI being mis-sold. It said this had led to it receiving a deluge of complaints from the public. The FOS is still getting 100 complaints a day, far and away the biggest source of grievances.

It is telling that independent organizations are praising this move by the Competiton Commission, while those with a vested interest in the continued abuse of the PPI system are critisising it. In my opinion this can only mean that the Commission is doing exactly the right thing.

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In further evidence of the worsening effect of the credit crunch on ordinary people there has been a sharp rise in the number of people and companies being declared insolvent in
England and
Wales.

Individual insolvencies went up by 8.8% in the third quarter of the year to reach 27,087. Corporate liquidations also went up by 10.5% in the same period, to 4,001.
The increases have been widely predicted because of this year’s sudden economic downturn and the consequent rise in unemployment. The rising trend started this year as the economy stated to slowdown under the impact of the credit crunch.

The number of receiverships, administrations and company voluntary arrangements, which are normally an attempt to rescue an insolvent business rather than shut it down, rose to 1,444. That was 65% higher than a year ago, the government’s Insolvency Service said.

The increase over the year is fairly evenly spread among the different types of procedure. But there is a definite trend towards procedures instigated by directors as they try to deal with their problems themselves.

Among the individuals going insolvent, there were 17,341 bankruptcies and 9,746 individual voluntary arrangements (IVAs) in the last quarter - 4.6% more than there were twelve months ago.

Individual insolvencies had in fact fallen in the second quarter of this year, but are now rising again. For bankruptcy orders there has been a pronounced shift towards debtor’s petition bankruptcies [people declaring themselves bankrupt] and away from creditor’s petitions in recent years. This is possibly due to the cut in the bankruptcy term to 12 months, and the general downturn in the property market which has undermined the only asset some people might have had.

A leading economic consultancy predicted that bankruptcies would continue to rise. “With the full effects of the credit crunch and rising unemployment yet to be felt, bankruptcies are set to soar over the coming two or three years. We expect the number of personal insolvencies to rise from around 110,000 this year to around 140,000 in 2009 and even further thereafter.”

There is little good spin that can be put on this news since it is a clear sign of the problems facing the economy. With both unemployment and bankruptcies continuing to rise there seems to be little hope that the UK is going to remain unscathed by the global economic storm.