PPI MARKET INQUIRY
Summary of Emerging Thinking hearing with HSBC on 28 February 2008
1. HSBC told the Competition Commission (CC) that it had agreed an extension of the
existing underwriting arrangements with Aviva for home, credit and travel insurance,
and that it had completed the sale of the Hamilton insurance companies to Aviva.
Withdrawal of PPI and sales of LifeChoices
2. HSBC said that it had decided at least temporarily, to stop selling PPI under its
HSBC, First Direct and Marks & Spencer brands. [ ]. HSBC was now offering
customers the chance to discuss their protection needs with one option being the
LifeChoices income protection product to enable customers to meet all their financial
3. The LifeChoices income protection product was constructed of four component parts:
life insurance; trauma; sickness; and unemployment cover. Once one of the core
elements had been purchased—life or sickness—the other components could be
added. LifeChoices was a regular premium product. The customer chose the level of
benefit they wished to purchase. [ ].
4. The key difference between the LifeChoices income protection product and PPI
products was the linkage between the credit and the protection product. LifeChoices
was sold to protect the customer’s lifestyle with no linkage to a credit product, so if a
credit product held by the customer was terminated early, there was no reason to
terminate Life Choices. LifeChoices was about offering protection for all expenditure,
including rent, school fees, maintenance payments or any other outgoings a
customer wished to protect. LifeChoices was a free-standing short-term income
protection product which HSBC did not regard as a substitute for PPI as part of the
protected credit market. [ ].
5. [ ].
6. Although it had, at least temporarily, stopped selling PPI, HSBC described its under-
standing of the PPI sale process. Customers sought either protected credit or
unprotected credit. HSBC believed that customers within the protected credit market
were interested in purchasing a loan with protection. It believed that it was very easy
for customers to access quotes for lending with or without protection and that there
were a sizable number of customers who, when researching which lender to go to,
would look at the total cost of the protected loan if that was what they were interested
in purchasing—though it did note that credit and PPI would be sold as separate
products [ ].
7. On the Internet, HSBC’s customers would get a personalised quote with and without
PPI [ ]. [ ], customers would have to go through the full application process,
although the marketing material would have advertised the typical APR, and this was
explained in the marketing material. Customers would not necessarily know the cost
of the credit until their application had been approved. What they could see from the
marketing material was the differential between protected and unprotected credit.
8. HSBC believed that credit markets were competitive, with a lot of searching and
sufficient information available to customers. Only a small number of marginal
customers were needed to search on the PPI element to make a PPI market
competitive. It was very clear that, wherever a customer shopped for credit, it was
straightforward to obtain the price of protected and unprotected credit.
9. HSBC said that of its protected loan customers, [ ] per cent had purchased
protected loans from it before and were therefore repeat, and necessarily informed,
purchasers. There were a number of pieces of consumer research which showed
that there were a substantial number of customers who looked at the total cost of
protected credit before deciding which institution to approach. Although taking PPI
did not affect approval of the applications for credit, the customers were very
conscious of the monthly repayment, which would include PPI.
10. HSBC believed that a customer who shopped around for credit would show the same
behaviour for protected and unprotected credit. Therefore, there was a high
proportion of customers saying that they had looked at the cost from more than one
company, and a high proportion of those were saying that they took into account the
total cost of the package. HSBC believed that they would have looked at the cost of
unprotected and protected credit because the information was available and easy to
11. HSBC Bank plc did not currently offer personal loans to those who were not existing
customers of HSBC Bank plc. However, it was in the market for offering personal
loans to, and for searching for offers by, its existing customers. HSBC noted that it
did not have an ‘exclusive’ relationship with its existing customers, who also
purchased financial products from, and therefore had ‘relationships’, with, other
providers. HSBC believed that its existing customers searched HSBC’s own
products, but also read the press, used the Internet accessed aggregator websites,
and searched for products of other providers, with whom they may also have an
12. Compared with other credit products, HSBC said that it was more common in the
mortgage market for customers to purchase a mortgage and a stand-alone product,
and hence customers in the protected mortgage market would meet their needs by
sourcing products from different providers, By contrast, in the protected loan and
cards markets, customers were more likely to meet their need for protected credit by
sourcing products from one provider.
13. HSBC said that it was more difficult to look at the bundled price for a credit card
because it depended on the customer’s credit card spending behaviour. For a loan,
the total price was much clearer because it was a structured repayment, whereas the
balance on and the repayments under a credit card would vary and thus it was less
clear what the combined price would be. However, it was not hard to use the prices
to rank suppliers, and it was a relatively straightforward calculation for customers to
combine APR and PPI cost in order to determine the overall cost of protected credit
Point of sale
14. HSBC said that, as customers carried out more research and became more informed
and with the expansion of the Internet, the point-of-sale advantage would diminish.
HSBC believed that there would be an increase in customers seeking stand-alone
protection. [ ]. HSBC agreed that if the sale of protection and the credit were de-
linked throughout the industry, there would be a reduction in the total sales of
protection as a whole.
15. When HSBC was selling PPI it did not notice any impact of the stand-alone products
sold by other providers on the sales of PPI. The volume of stand-alone sales was not
high enough for HSBC to note or understand the impact. If a customer did not
purchase a loan from HSBC and purchased protection elsewhere, HSBC would not
necessarily know that. Therefore HSBC would not understand that it had lost sales
from the protected market to the unprotected market. The market was, however,
moving with the launch of stand-alone products by other large providers. One reason
stand-alone providers had been unsuccessful in the past was because of a degree of
anti-selection where a customer was purchasing a stand-alone product. HSBC
believed that the offerings being made by major providers might overcome this anti-
selection problem because they would know more about the customers to whom they
were selling the product. In the same way, HSBC said that it had some knowledge of
the customers purchasing its LifeChoices income protection product. If there was a
large demand for stand-alone protection then the impact of anti-selection would
diminish. It had always been true of PPI that with a level of penetration above [ ]
per cent there was less need to be worried about anti-selection.
16. HSBC said that the ICOB regulations introduced in 2005 [ ]. Firms that took training
seriously saw an increase in their penetration rates because staff were more
confident in the product. Over time, that advantage was lost: adverse media
coverage undermined a lot of that confidence both in customers and the sales force.
Consequently, the sales force perhaps felt less confident about selling the product,
which had an impact on overall penetration rates. The sales process had since
become more complex and time consuming and a number of customers did not want
to spend the time to be taken through a fully-compliant, best practice sales process.
17. The penetration rate for PPI increased closer to the loan score cut-off, as those
customers understood that they had a higher probability of an adverse change in
their financial circumstances and would be more inclined to purchase PPI. HSBC
added that the bad debt experience of PPI customers was considerably worse than
that of non–PPI customers in a way that would not necessarily be picked up from the
18. HSBC said that the sale of its LifeChoices income protection product required either
19. [ ].
20. HSBC considered that there were two relevant markets: for protected credit (demand
for the credit product and for the protection of repayments on it) and for unprotected
21. In practice, because the sales process involved a customer requesting to take out the
credit product before any discussion of the customer’s PPI needs, HSBC would not
at that point know whether the customer’s demand was for protected or unprotected
credit, [ ]. HSBC believed that if it put up the price of PPI, so that protected credit
would become more expensive, that would cause some customers to take
unprotected credit elsewhere and others to take unprotected credit rather than
protected credit. If the price of PPI went up across the market as a whole, there
would be customers who were interested in protected credit but felt that it was too
expensive and would not borrow at all.
22. HSBC believed that a price rise of 5 per cent on its protected credit product would
cause a reduction in sales, because it was relatively easy for customers to find out
the cost of protected credit across the market. It had shown in its response to the
CC’s Emerging Thinking that a 5 per cent increase in the price of its protected credit
offer would make its offer less attractive relative to some of its competitors. That
reduction in sales would make its activity unprofitable. HSBC had exited from the
protected credit market and it believed that it had lost protected credit customers.
Some would have switched from protected to unprotected credit; some would have
met their wider protection needs by purchasing LifeChoices; and some would have
gone elsewhere to purchase protected credit from another provider. [ ].
23. HSBC disagreed with the CC’s findings that PPI distribution was highly profitable. It
believed that the returns were normal and consistent with effective competition in the
market for protected and unprotected credit products. While there were some
differences in the relative contribution of sales to protected and unprotected credit
customers, these differences were not that great due to the significantly higher levels
of bad debt incurred in extending credit to protected credit customers.
24. HSBC did not think that the CC should look at PPI as an add-on product. It was not
an add-on product.
25. HSBC did not accept the CC’s market economic model; nor, it did not agree with the
operational cost and the cost of capital allocated. However, it had undertaken further
analysis, using the market economics model used by the CC, which had shown a
materially different conclusion to that drawn by the CC.
26. HSBC had carried out the analysis which had sought to explore how much additional
bad debt was being taken on by making credit available to PPI customers. It was
highly concerned that, in assessing the profitability of PPI distribution, the CC’s
published paper on Profitability had not taken into account some very significant
costs, most notably that there was an additional bad debt charge introduced by
selling loans to customers who chose to take out PPI that was not captured by the
27. In terms of costs, HSBC said that the way in which the business was managed was
not to allocate costs by product—[ ]. It saw no reason why the cost income ratio for
PPI would be much less than the cost income ratio for the whole of the bank’s
operation. On capital, HSBC noted that the CC was drawing conclusions about the
return on capital being high, but it said that the capital assumed in the CC’s model
was only regulatory capital and not economic capital.
28. HSBC said that when it was selling PPI, it set the prices of credit, and of bundled
credit and PPI, with reference to [ ]. In terms of profitability levels for protected and
unprotected credit, both of those markets made a positive contribution to HSBC and
both made a contribution that it would regard as a normal level.
29. From customer research carried out by HSBC, other parties and the Office of Fair
Trading (OFT), there was clear evidence indicating that customers had prior
knowledge of, and shopped around for, protected credit. Such customers
approached a number of providers of protected and unprotected credit and presented
themselves as customers shopping in the protected or unprotected credit markets.
The FSA comparison tables would add a further layer of information that would help
in shopping around and searching. These would be useful not only in terms of
providing customers with price information, but also in terms of providing customers
with comparative data on the terms and conditions and coverage of the products
30. HSBC said that the Defaqto rating system introduced a competitive impetus into the
market. The five star methodology was gaining credibility across the general insur-
ance market and a number of competitors were starting to use it a method of
communicating to their customers the quality of the product.
31. HSBC had seen improved coverage within the product and changes that had been in
response to competitor activity. Examples given included its carer cover and its back-
to-work assistance. The launch and roll out of its LifeChoices income protection
product was an example of a response to competition; [ ]. In terms of product
development, HSBC stated that it had spoken to customers about their needs and
then looked at what type of propositions it could offer to meet those needs. In
addition, HSBC looked what other products were on the market attempting to meet
those needs, for example the Post Office Lifestyle Protection product. Another
example where HSBC moved for competitive reasons was pre-existing exclusions,
where it saw a general movement within the industry to soften the severity of the
exclusion of a pre-existing condition.