Unsecured loans, also known as unsecured loans or credit. Does not require any collateral, only proof of identity, income proof, address proof and other materials (concrete evidence to see what banks) to banks for loans, bank credit according to the circumstances of individual loans, interest rates generally higher on a mortgage loan, customers can choose the specific circumstances of individual loans for years, and then sign contracts with banks, security.
11 May 2007 Non-Confidential Version COMPETITION COMMISSION MARKET INVESTIGATION INTO PAYMENT PROTECTION INSURANCE ("PPI") MBNA BANK EUROPE LIMITED'S COMMENTS ON THE ISSUES STATEMENT These are MBNA Bank Europe Limited's ("MBNA") initial thoughts on the points raised by the Competition Commission in its Issues Statement published on 12 April 2007. MBNA will be happy to discuss the issues in more detail at the hearing to be held on 26 June 2007. Background 1. MBNA is a subsidiary of FIA Card Services NA, a national bank organised under the laws of the United States of America. MBNA's ultimate parent company is the Bank of America Corporation which acquired MBNA on 1 January 2006. 2. The principal activity of MBNA is personal lending and ancillary activities in the United Kingdom, the Republic of Ireland and Spain. The group has its headquarters in Chester and operates through branches in the Republic of Ireland and Spain. 3. MBNA entered the UK market in 1993. MBNA issues credit cards under the MasterCard, Visa and American Express brands. It offers both consumer and business credit cards. MBNA has traditionally focused on issuing affinity cards and now has over 850 partnership programs with groups as diverse as Alliance & Leicester, Virgin, SONY, the National Trust, BMI and Breakthrough for Breast Cancer. MBNA is the only credit card issuer in the UK that has the organisational structure and technology platforms to support such a diverse set of partners. 4. At present, MBNA also provides unsecured loans. However the company has decided recently that it will cease offering new unsecured loans and run down its existing unsecured loans business. 1 5. MBNA offers PPI products associated with its credit card and unsecured loan products (ie PPI for unsecured loans and for outstanding credit card balances). It also offers other insurance products (for example: travel, car and home insurance), but this constitutes a relatively small part of its overall business. MBNA does not offer PPI as a stand-alone product. 1 MBNA informed members of the Competition Commission at the site visit on 27 April 2007 that it had announced internally that it would cease offering unsecured loan business. It will continue to offer a loans broking service through its subsidiary, loans.co.uk, which it acquired in 2005. 2081284 -2- PPI 6. PPI is an insurance product that provides cover in connection with an underlying credit product. The purpose of PPI is to protect the borrower’s ability to maintain repayments and to help him avoid getting into debt should he be unable to keep up his repayments owing to accident, sickness, unemployment or death. 7. Payment under a PPI product is made direct to the provider of the underlying credit product. The insurer and the lender develop systems to ensure that the customer's specific loan account or credit card account is credited directly with any insurance proceeds. This is a considerable benefit to any customer who is concerned to ensure that his loan/credit card payments are protected. Moreover, the payments are not taken into account in calculating the customer's entitlement to any state benefits (in this respect PPI differs from certain other insurance products, including income protection). Special features of MBNA 8. In the document setting out its reasons for making a market investigation reference, the OFT identified four main PPI products: • PPI on first-charge mortgages; • PPI on second-charge mortgages and other secured loans; • PPI on unsecured loans; • PPI on credit card repayments. 9. MBNA has traditionally focused on the provision of credit cards and unsecured loans. It does not offer first-charge mortgages, second-charge mortgages or other secured loans, nor does it offer PPI related to those products (and, as noted above, it will cease offering unsecured loans). 10. Unlike many other providers of credit cards, unsecured loans and insurance products, MBNA does not have a high street presence, nor the type of established relationships with consumers, eg through the provision of current accounts, which many of its competitors enjoy. According to the OFT, in 2005/6, 90% of households had a personal current account. The OFT has commented that consumers may buy additional retail banking products from their current account provider, suggesting that current accounts can also act as a 'gateway' to the sale of other products. 2 11. Instead MBNA has developed and continues to develop its customer relationships through innovative means, for example through its partnership programmes, affinity 2 OFT918, Personal Current Accounts in the UK, April 2007. 2081284 MBNA -3- products and marketing initiatives. Since MBNA, lacking the advantages of cross-selling, has to invest heavily to attract customers, it is very much in its interests to retain those customers, which it aims to do by providing products that they want, backed up by excellent customer service. Given the relatively limited range of products offered by MBNA, if a customer were to become dissatisfied with any MBNA product, MBNA risks losing the relationship entirely (whereas a financial institution offering a greater range of products might retain a customer relationship for at least some of their products even if a customer were dissatisfied with a particular aspect of a particular product). 12. This is very much the case with the PPI products that MBNA offers. Since PPI products are so closely connected with the underlying credit card or unsecured loan, if a customer becomes dissatisfied with the PPI product, there is a serious risk that MBNA will lose the customer for both the PPI product and the main credit product. 13. MBNA is therefore very focussed on delivering excellent customer service and avoiding any situation in which customers, having purchased a product, feel that they are not obtaining value for money. In relation to PPI products, this means that MBNA: • provides customers with information about PPI products at an early stage; • always provides quotes for unsecured loan products and credit card products both with and without PPI without being prompted; • makes clear that PPI is optional; • explains the eligibility criteria, policy cover, exclusions and price; • provides hospitalisation cover and life cover for customers aged 65 to 70; • encourages customers who are struggling to make repayments to claim on their PPI where the relevant claim criteria are met (for example, if payments are outstanding for more than 30 days, MBNA will write to customers who have a PPI policy, asking them whether they have considered making a claim); MBNA also reimburses the cost of medical certificates (up to £15 per certificate) since it considers that this cost might otherwise discourage certain customers from submitting a claim; • excludes customers who have made a claim from any interest rate increases that would otherwise apply to the underlying credit product for the time during which payments are being made under the claim. 14. MBNA also adopts a judgemental lending approach for a large proportion of applications. 2081284 MBNA -4- • Cards: credit risk is assessed through the use of credit risk scores and judgemental lending. MBNA uses generic bureau scores for every application in addition to using a custom developed applicant risk model. Niche scorecards are used at the margins of MBNA's lending spectrum to refer higher risk applications for judgemental review. Manual underwriting is undertaken in XX% of cases. • Loans: credit risk is assessed through the use of credit risk scores and judgemental lending. MBNA uses generic bureau scores for every application in addition to using a custom developed applicant risk model. Manual underwriting is undertaken in XX% of cases. In general terms, MBNA considers a range of factors, rather than relying on a mechanistic scoring process. Thus MBNA will take into account an applicant's stability (time at address/time in employment, etc); ability (income, disposable monthly income); and willingness (credit references, credit card and bank statements submitted by the applicant and information provided by MBNA's strategic partners). Relevant geographic market 15. MBNA considers that the geographic market is likely to be national in scope, both for credit card PPI and unsecured loans PPI. Relevant product market 16. MBNA considers that PPI is generally not regarded as a stand-alone product by suppliers or by customers. 17. It is MBNA’s view that PPI and the underlying credit product are closely related, in terms of both their design and the customer’s perception. For example, in the case of credit card PPI, the PPI product should ideally reflect any minimum repayment provisions in effect with regard to outstanding balances. MBNA was recently required by the US Office of Comptroller of Currency to increase the minimum monthly repayment on its credit card products to £25 to avoid negative amortisation. As a result, MBNA's minimum PPI claim payment is in the process of being increased to 5% or £25, whichever is the higher (it currently stands at 5% or £10 to reflect the existing approach). 18. MBNA believes that customers purchase PPI as an add-on to the credit product, rather than as a self-standing product. More specifically PPI is only purchased if: • the customer also obtains (in the case of MBNA) a credit card or an unsecured loan which gives rise to an obligation to make regular payments to pay off the debt; and 2081284 MBNA -5- • the customer wants the comfort of knowing that he will be able to meet those payments even where there are unexpected changes in his circumstances (to the extent that this ability is not already safeguarded through some other form of insurance, such as income protection or critical illness cover). 3 19. A customer will therefore tend to consider whether he wishes to obtain PPI when he is thinking about obtaining the primary product, ie a credit card or an unsecured loan (and sometimes only after the primary product has been purchased). 20. Thus, even though there are cases in which PPI and the underlying credit product could be provided and purchased separately, it is MBNA’s view that there are strong complementarities on the demand side and that therefore the so-called "point-of-sale advantage" enjoyed by the provider of the primary credit product – a point of concern raised by the OFT and reflected in the Issues Statement – should not be regarded as a potential indicator of a restriction or distortion of competition, but rather as the inevitable consequence of customers’ preferences for purchasing both the credit and the PPI product together. The fact that the customer is able to buy PPI cover at the same time as the underlying credit product is extremely convenient for the customer. If customers were unable to buy the two products at the same time, there is a real risk that some customers might not obtain the cover that they need. 21. Given the relationship between the primary credit product and the PPI product described above, MBNA considers that - at least in relation to the products it offers - the relevant market is likely to comprise both the underlying credit product and the PPI product. This is the case even though customers may choose not to buy the PPI product, or to buy it later. In considering how to position its own offering, MBNA researches what its competitors are doing in relation to both the underlying credit product and the associated PPI product. 22. In relation to the services it offers, MBNA considers that the relevant market is therefore likely to comprise competing packages of credit products and PPI products, eg credit cards with associated PPI ("credit card/PPI packages") and unsecured loans with associated PPI ("unsecured loan/PPI packages"). 23. In MBNA’s view, many customers are able and willing to substitute between different forms of credit (repayment of which they may then wish to protect through taking out PPI). For example, an agreed overdraft on a current account (in combination with a debit card) may be considered to be a substitute for a credit card; rather than taking out an unsecured loan in order to finance a particular purchase, customers may take the decision to re-mortgage their property in order to obtain a cash sum to make the 3 Note, however, that an advantage of PPI is that it is in addition to other cover and does not affect the amount of State benefits that might be payable. 2081284 MBNA -6- purchase. A customer obtaining a loan may reduce the level of outstanding balances on a credit card, and so forth. 24. However, regardless of how strong these competitive constraints between different forms of credit (and their associated PPI product) are, MBNA believes that even if the Competition Commission were to consider narrow markets for different types of credit there is very strong competition between providers of (i) credit card/PPI packages and (ii) unsecured loan/PPI packages. 25. First, there are a large number of providers of credit card/PPI packages and unsecured loan/PPI packages in the UK who offer a diverse array of products. Second, it is an innovative sector which has seen new entry over the years, MBNA being a good example of a later entrant which gained market share by offering a different product offering. Consumers therefore have a wide range of choice, and are, in MBNA’s experience, prepared to and can switch easily between credit providers. 26. Notwithstanding the fact that PPI in the majority of cases is purchased together with -- and from the same provider as -- the underlying credit product, standalone providers of PPI also provide a competitive constraint (even though there are relatively few standalone providers at present). 27. Furthermore, MBNA considers that other insurance products also provide a competitive constraint. Income protection and critical illness, while not entirely substitutable for PPI, provide an alternative for consumers who wish to protect themselves from the financial consequences of events such as accidents, sickness or unemployment and ensure an income stream or lump sum payment which they can then use to cover their ongoing expenses, including repaying loans. MBNA has been piloting an income protection product which it has offered as an alternative to PPI with its unsecured loans. Competitive indicators 28. The Competition Commission has set out a number of indicators of competition, including pricing, profitability, and customer behaviour. 29. As noted above, PPI is a secondary product which MBNA provides, and its customers purchase, as part of an overall bundle. All aspects of MBNA's business are involved in the provision of that bundle, including product design and sourcing; business development; marketing; sales; fulfilment; portfolio risk management; claims and administration; and the control environment. Allocation of costs and measuring profitability of PPI on a standalone basis is therefore extremely difficult and not very meaningful. 2081284 MBNA -7- 30. The close relationship between the primary credit and the secondary PPI product suggests that it may be difficult, if not impossible, to establish any meaningful comparison of prices and costs for PPI in isolation. For example, to the extent that customers tend to purchase credit and PPI from the same provider, customer acquisition costs are incurred by the provider in order to generate revenues from both the credit and the PPI product. 31. Similarly, attempts to establish the profitability of PPI on a stand-alone basis may not produce meaningful results, given that PPI is closely interwoven with the primary product. Indeed there is no separate and fully costed profit-and-loss account for PPI services within MBNA. 32. In purely practical terms, the fact that PPI and the underlying credit product are offered together may also have implications for the analysis of data provided by the various respondents to the Competition Commission’s questionnaire. There would seem to be a considerable amount of discretion with regard to allocating costs against the provision of the PPI product, and it may therefore be difficult to obtain returns from the various providers on a consistent basis, in particular where institutions differ in the range of products they offer or where credit providers and insurers are vertically integrated. 33. The Competition Commission considers that the presence of cyclical effects may impact on the choice of an appropriate period over which profitability should be assessed. MBNA would point out that the appropriate period over which profitability (at an appropriate level of aggregation) is assessed should not just be sufficient to take into account cyclical fluctuations, but should also cover periods of considerable investment in establishing reputation and goodwill. Too short a period may only provide a snapshot picture of profitability, failing to take into account the fact that considerable investments had to be undertaken by financial institutions to establish their market presence. 34. The Competition Commission also raises the issue whether profits from the sale of PPI are being used to subsidise the primary credit products. MBNA would make the following two preliminary observations. • First, since many suppliers – like MBNA – provide the primary credit product and PPI very much as a package, a significant proportion of costs may most appropriately be regarded as common across the primary and the secondary products. Both the revenue from the primary credit product and the revenue from the related PPI product contribute towards the recovery of these costs. Of course, the relative magnitude of these contributions may differ, but such a situation should not be described as "cross-subsidisation". Put differently, even though one product may appear to be making losses, and the other product may appear to be very profitable, this may only be because of an arbitrary allocation of 2081284 MBNA -8- fixed and common costs incurred in the provision of both products and should therefore not be regarded as cross-subsidisation. • Second, any analysis of the relative contribution towards the recovery of fixed and common costs coming from the primary and the secondary product – and in the extreme case even cross-subsidies flowing between these 4 - would have to take into consideration the fact that with regard to both the underlying credit product and the PPI product customers tend to be better informed about various factors that have an impact on the risk they pose to the lender, and the likelihood that they will make a claim under their policy. Higher PPI premiums will not only reduce the number of customers who take out that type of insurance, but also affect the average risk across the pool of PPI customers; similarly (and despite MBNA’s efforts to assess as accurately as possible the credit risk posed by individual customers through its judgemental lending approach), increasing APRs will not only reduce demand for the credit product, but also affect the average credit risk across the pool of borrowers. These effects mean that great care is required in order to establish the impact that changing the structure of prices (eg lowering PPI premiums and increasing APRs) would have, not only on take-up volumes, but also on the characteristics of those who decide to take out the product, and thus on the lender’s costs. In other words, the implications of customer self-selection in response to particular pricing structures need to be considered carefully in order to establish the competitiveness (or otherwise) of specific pricing models. Wholesale market 35. MBNA considers that the wholesale market is competitive. MBNA carries out a competitive tendering process before appointing an insurer. Until 1 January 2005, MBNA's PPI products were underwritten by Norwich Union. In late 2003/early 2004 MBNA went out to tender for a new contract, approaching ten insurers, six of whom responded. The contract was ultimately awarded to St Andrew's Group (part of HBOS). The decision to appoint St Andrew's was based on a whole range of factors, including product range; clarity of policy wording, claims advice and guidance; customer satisfaction/service levels, particularly for claims handling; financials; proven track record; and ability to support European growth. Relevance of the Competition Commission's store card inquiry 36. The OFT's terms of reference exclude store card PPI, on the grounds that it would be disproportionate to include store card PPI in another reference when it was considered so 4 A cross-subsidy would exist where the revenues from the provision of one of the products were insufficient to cover the incremental costs that are incurred in providing this product. 2081284 MBNA -9- recently in the store card inquiry and the remedies following that inquiry only took effect on 1 May 2007. 37. Credit card PPI (in particular) bears many similarities to store card PPI, both of which are based on the protection of payments on monthly outstanding balances on the cards. 38. MBNA considers that there is no obvious reason why credit card PPI should raise manifestly different issues to store card PPI or why credit card PPI should be treated significantly differently to the way in which the Competition Commission treated store card PPI in its store card inquiry. Impact of other regulation 39. The Competition Commission is of course required to focus on competition issues rather than wider issues such as mis-selling. However, the FSA will continue to investigate PPI during the Competition Commission's inquiry. In particular, the FSA has indicated that it is considering the introduction of additional rules for PPI in its Insurance Conduct of Business (ICOB) sourcebook at the end of this year. 5 40. MBNA considers that the Competition Commission will need to take into account developments in response to the FSA's investigation, as well as other industry developments as its inquiry proceeds. 41. MBNA is subject to very considerable regulatory oversight, not only in the UK but also from the US Office of Comptroller of Currency. This not only impacts on the way in which MBNA conducts its business, but also takes up a considerable amount of management time and imposes significant compliance costs. * * * * * 5 FSA: "ICOB Review: Interim Report: Consumer Experience and Outcomes in General Insurance Markets", March 2007. 2081284 MBNA
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