Drawing a line under protection racket

LONDON BRIEFING: The big banks have decided to halt their battle over payment protection insurance

ONE OF the financial services industry’s most shameful episodes – and there are plenty to choose from – is drawing to a close following the decision of the big banks to call a halt to their battle over the mis-selling of payment protection insurance (PPI).

Millions of UK consumers are in line to collect compensation totalling up to £9 billion (€10.2 billion) after the industry wisely decided against mounting a challenge to the recent High Court ruling that new guidelines governing PPI sales be imposed on products sold in the past.

Precise estimates of just how many customers were mis-sold the expensive (and in many cases completely useless) insurance are hard to pin down, but could be anything from three million to four million-plus. These were the people who paid through the nose to insure repayments on loans, mortgages and credit card bills, giving them what they thought was prudent protection against the risk of falling sick or losing their jobs and thus being unable to cover their debts.

For some, it made perfect sense to take out PPI. For millions more, though, PPI was totally inappropriate; people such as the self-employed, who would never be able to claim against becoming unemployed; or those who fell ill as a result of a pre-existing condition, which invalidated their insurance. Yet they were persuaded by the banks to buy the worthless policies through a combination of hard-sell, lies and misinformation. In many cases, customers were refused the loan or mortgage if they declined the PPI and highly incentivised salespeople glossed over details such as the fact that the insurance on the loan would cost more than the interest on the debt. Customers were frequently unaware that they were paying for PPI at all.

Not surprisingly, PPI became hugely profitably for the banks, partly because of the inflated premiums but largely because so little was ever paid back to the customer. Three years ago, after a lengthy investigation, the Competition Commission found that for every £100 received in premiums for PPI, just £15 was paid out to cover customers’ claims. That is a fraction of the £78 paid out in car insurance and £54 in home insurance.

Even customers who qualified for payouts found themselves faced with unnecessarily complex claims procedures and lengthy delays before they received the money due to them. No wonder PPI was dubbed “a protection racket” by consumer groups, which have fought a fierce campaign against it.

They are understandably jubilant that the big banks have finally given up the fight. Lloyds Banking Group, market leader in PPI, had made the cave-in inevitable last week when it unexpectedly broke ranks to say it would no longer fight the High Court ruling. New boss António Horta-Osório clearly wished to draw a line under what has become one of the banking industry’s worst mis-selling scandals. But drawing a line does not come cheap – for Lloyds alone the cost will top £3 billion, while Barclays’ bill is put at £1 billion, and for Royal Bank of Scotland the estimate is £850 million. HSBC’s costs are a more modest £270 million as it withdrew from the market four years ago.

As for the customers, those who have had outstanding claims with the banks for years should now see swift repayment and an avalanche of new claims will be lodged over the coming weeks. The success rate is expected to be high, with the majority of cases upheld – after dragging their heels on the PPI scandal for so long, the banks will be paying up if there’s even a hint of mis-selling.

It’s good news for bank workers too, thousands of whom have lost their jobs since the financial crisis. The industry has been warned by the Financial Services Authority that there must be no further delay in settling the claims and the banks are preparing to take on hundreds of extra staff to process the paperwork.

The big losers are, of course, the banks, along with the hoards of claims management firms that had been hoping to cash in on the compensation fight. Do a Google search for PPI and you’ll find the top half of your screen filled by ads for “no-win-no-fee” firms urging you not to miss out on the PPI payout. But the claim process will be pretty straightforward and, unless customers want to be ripped off twice, those with a case for compensation should put their own claims in without delay.

Fiona Walsh writes for the Guardian newspaper in London