PAYMENT PROTECTION INSURANCE (PPI): REGULATORY HICCUP OR CATALYST FOR A BANKING REVOLUTION?
By Roger Davies, Principal Consultant, ea Consulting Group
The humble Payment Protection Insurance (PPI) policy may have triggered a revolution in UK retail banking. With total provisions across the industry for PPI sales abuse now estimated at £22.2 billion, we have witnessed the world’s biggest mis-selling scandal. Clearly, bank standards and procedures must change. Many will be baffled at how such a simple insurance policy, providing valuable cover in meeting loan repayments if affected by illness or unemployment, can have led to consumer detriment on such a large scale. Essentially, PPI for banks had become ‘the’ cash cow product, with premiums set arbitrarily high and a labyrinth of often undeclared policy exclusions.
The staggering figures involved confirm that this is a long running saga. Initially, the banks staunchly defended their actions and denied any pandemic mis-selling. The Office of Fair Trading, after years of expressing concern, became involved in 2007 and rapidly escalated the issue to the Competition Commission. The Consumers’ Association immediately raised the stakes stating that one in three PPI customers had been sold a useless policy. The UK regulator eventually agreed and instigated a bank-wide review involving the mass compensation of PPI holders. The latest complaints data published by the UK regulator for July-December 2013 shows that some 56% of the 2.479 million complaints submitted related to PPI. A whole industry, believed to consist of some 1,050 firms, has now sprung up to assist consumers in claiming compensation from their lenders. Although an expensive route, with an estimated £5 billion paid in fees, many bank customers have welcomed such support. The Lloyds Banking Group alone is said to have 6,000 staff working on PPI claims.
To impartial observers it appears that the sales processes which have evolved for personal lending have been fully compliant with the consumer credit regulations. However lenders often ignored the basic requirements of the Insurance Conduct of Business rule books governing the supporting PPI policy. Despite the current scandal, it must be remembered that PPI has been around for over 25 years. Indeed, it still provides very important cover for the appropriate customers. PPI compensation has even provided a welcome boost to a lacklustre economy during times of austerity! However, the heyday of PPI as a mainstream retail banking product providing a key income stream for all the leading banks is undeniably over. The Competition Commission introduced new regulations in 2011. Essentially, the latter de-couple the sale of payment protection products from the personal loan or credit card agreement requiring separate quotations and introducing a 7 day “prohibition” period before PPI can be sold. The revised regulations adopted should ensure that PPI is only sold when suitable to the needs of the customer.
All UK lenders must be mindful that the Financial Conduct Authority (FCA) may well set a deadline for the PPI reviews to be completed and for final compensation payments to be paid. In February 2014, the Lloyds Banking Group was fined £4.3 million for delaying compensation payments to 140,000 customers. UK banks and building societies should, therefore, be well advanced with a detailed review of all relevant PPI sales, and in the process of paying compensation, where appropriate. This is, however, a bigger issue than just PPI. It is essential that all sales processes are reviewed by financial services companies to ensure that in every instance the consumer is being treated fairly. The FCA will expect the TCF principle to have been applied throughout the product design phase, with detailed evidence from a suitable audit trail. All providers must also regularly test to ensure that product sales are entirely appropriate and being achieved in their targeted market. There must be no potential threat of consumer detriment.
It is clear that there had been major deficiencies with bank governance over the sale of PPI for a prolonged period of time. This unsatisfactory situation has been exacerbated by an almost identical set of circumstances leading to another major scare with IRSs (or Interest Rate Swaps), with an ongoing review and the prospect of multi-billion pound compensation. We are, of course, dealing with retail banking products. We cannot blame investment bankers and the complex products labelled by Lord Turner as serving ‘no economic purpose’. Sir Richard Lambert’s new Banking Standards Review Council announced, at the behest of the major banks, hopes to reform banker behaviour. There must, however, be severe doubt that the public will recognise the body as independent when it is funded by the banking industry. It should be recognised that it is a failure of the compliance and risk functions to deliver fair sales processes, which has led to the mis-selling crises. As a short-term and inexpensive solution, it is suggested that the director of compliance in any major bank should be an independent appointment, with an additional reporting line to the FCA. Such a role offers benefits to both consumer and regulator in ensuring that an organisation is acting professionally and always treating its account base appropriately.
Trust in the traditional High Street banks is at an all-time low following both this series of mis-selling scandals and the tax-payer bail outs of RBS and LloydsTSB. Much has been said about the banking industry losing its ‘moral compass’ with PPI and whether this leopard can ever change its spots? M&S has just launched a market leading current account and the Bank of England is currently considering 22 applications for new banking licences.
The threat posed by the challenger banks to the established order is undeniably on the rise, and PPI mis-selling appears to have set this ball rolling. Furthermore, all political parties will feed on anti-bank sentiments in the period leading up to the next General Election. The major banks now have one chance to put the genie back in the bottle and convince a sceptical public, fuelled by social media, that it is capable of reform. The Big Banks must overcome their deeply embedded sales culture and adopt a new service-based ethos, only ever acting in the best interests of their customers. For the existing High Street players, failure is not an option.