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The Actuary The magazine of the Institute & Faculty of Actuaries
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Soapbox: Banks bite the PPI bullet

It was painful watching them get there but the UK’s high-street banks have eventually made the right decision over paying compensation for the large-scale mis-selling of payment protection insurance. The decision to drop the case against the Financial Services Authority’s (FSA) instruction to pay-up is certainly the right one in terms of liability and could be truly shocking in terms of quantum.

Why should the banks pay up? Quite simply, because they mis-sold the policies over several years as the very lengthy report from the FSA documented. Hungry — that is a polite way of putting it — for the commission that came with selling PPI as the consumer credit market boomed, the banks abandoned any sense of meeting their customers’ needs by matching them up with appropriate products.

Tens of thousands of self-employed people who were never eligible to claim and people with a range of pre-existing conditions that would automatically disqualify any claims were sold policies. As the first rumblings of concern that there were some potential problems with PPI sales started to be heard in 2006, the trade union federation Alliance for Finance told the All Party Parliamentary Group on Insurance & Financial Services that its members — bank counter staff — were being set targets for PPI sales that could only be reached if the policies were sold to people who didn’t need them or wouldn’t be eligible to claim under them. The MPs were shocked but everyone else, including the FSA at that time, merely shrugged their shoulders.

This scandal is now among the worst to hit the financial services sector. Estimates of the likely costs of the compensation have been hotly disputed by the banks, especially by their trade body, the British Bankers Association.

When the FSA issued its first estimate of the likely cost of redress last August, it came out with a tentative figure of £4.5bn. Earlier this year when Jonathan Evans, Conservative MP for Cardiff North and chairman of the All Party Parliamentary Group on Insurance & Financial Services, said £4bn to £5bn would be the starting point for compensation, he came under attack from several in the banking sector, especially as he was arguing that the bill was one for them to pick up, not the rest of the retail financial services sector already reeling from the additional costs imposed on it by the Financial Services Compensation Scheme.

Not surprisingly, he now feels vindicated: “We have been proved right in our arguments that PPI compensation is the responsibility of the banks and that the costs shouldn’t be spread across other parts of the financial services sector, although some such as credit brokers might still be impacted. “I also feel very comfortable with what I said about the likely quantum earlier this year and which was criticised by the banks. Indeed, my suggestion that it could easily reach £5bn is now starting to look conservative,” said Mr Evans.

It does indeed look a conservative figure. The first breach in the previously impregnable wall of bank opposition to paying compensation came when the Lloyds Banking Group announced that it was going to withdraw from any further collective legal action and pay up to the tune of £3.2bn. The other banks gradually followed suit although most have been rather cautious about putting an estimate of their total liabilities on the table. Lloyds is believed to have had around a 40% share of the market so a simple calculation suggests that the final bill for this will be upwards of £8bn putting it well ahead of endowment mortgage mis-selling which cost £2.7bn and taking it into the same orbit as the worst scandal of them all, personal pensions, which cost £13bn to put right.

As to the numbers of people affected, it is estimated that this will be in excess of three million with 1.5 million having already complained to the FSA. The industry is talking of taking on 6000 people to handle the complaints and is facing the prospect of additional heavy fines from the FSA if it fails to meet the demanding timescale it has set for responding to complaints.

When you look at these numbers it is not hard to understand why the financial services sector faces ever-tougher and more expensive regulation. It only has itself to blame.

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David Worsfold is group editorial services director at Incisive Media