UK car insurance probe casts cloud over Direct Line IPO

Fri Sep 28, 2012 7:07am EDT
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By Matt Scuffham and Myles Neligan

LONDON (Reuters) - Britain's competition regulator will investigate the motor insurance market after a consumer watchdog found signs drivers are being overcharged, in a move that could dampen demand for the flotation of industry leader Direct Line.

The Office of Fair Trading (OFT), Britain's main consumer affairs watchdog, said on Friday it had referred the industry to the Competition Commission for an inquiry that could take up to two years.

The OFT said it had "reasonable grounds for suspecting that there are features of the market that prevent, restrict or distort competition".

The decision comes as Britain's biggest motor insurer, Direct Line, prepares to price an initial public offering (IPO) expected to value it at about 2.5 billion pounds ($4.1 billion).

The probe could "put a spanner in the works" of the IPO, London's biggest in over a year, Shore Capital analyst Eamonn Flanagan wrote in a research note.

Direct Line's owner, Royal Bank of Scotland (RBS.L: Quote), is selling the business to win European regulatory approval for government aid it received in the 2008 crisis that left it 82 percent state owned.

The OFT's concerns centre on how insurers provide replacement vehicles and repair services to customers involved in accidents they do not cause.

Insurers of drivers who are not at fault refer them to car hire firms and repair garages which charge more than the market rate in return for a fee, the watchdog said in a provisional finding in May.   Continued...