How the Payment Protection Insurance (PPI) scandal unfolded
A voice for ordinary folk
Before we delve into, what became the largest financial scandal in UK history, it’s worth pointing out that this was the first time that the “Joe public” had the opportunity to have his voice heard and make a stand against the might and strength of the financial and banking industry.
For many years the UK financial services industry were self regulating and as such a law unto themselves. With the advent of the Financial Services Act 1986 things changed. The act created the Financial Services Authority (now the Financial Conduct Authority) whose brief was to regulate all financial institutions including banks, building societies and life assurance companies. So from then on everyone had a government organisation to whom they could complain if they felt there was wrong doing. Regulation and examination from without as opposed from within was something the financial services industry certainly didn’t want but now the rule book said they had to.
The rise and fall of the PPI policy
PPI (Payment Protection Insurance) policies have been sold alongside mortgages, loans and credit cards since the 1990s. They were meant to repay people’s borrowings if their income dropped because they lost their jobs or became ill.
Critics say the banking industry began aggressively selling PPI to customers after realising that the policies were highly profitable. In 2004 the Guardian newspaper revealed that many banks were returning just 15% of their PPI income to claimants, making PPI much more lucrative than car or house insurance. Barclays and HBOS, the latter now owned by Lloyds, were both shown to be making huge profits from PPI.
In 2014, the Financial Conduct Authority estimated that in the 20 years from 1990 to 2010, 45m PPI policies were sold, generating £44bn in premiums. The FCA has also said the amount of PPI policies may have been as high as 60m. The PPI policies were big business for the banks: in 2006 alone, the 12 biggest lenders made a profit of £1.4bn on PPI policies – a return on investment of 490 per cent.
The Citizens Advice Bureau (CAB) waded in with an investigation that labelled PPI a “protection racket”.
According to the CAB there were four main areas of contention as per below:
• Expensive – with premiums often adding 20% to the cost of a loan, and in the worst cases over 50%.
• Ineffective – structured to limit the chances of a payout to someone who was genuinely ill.
• Mis-sold – without the customers’ knowledge, or sold as “essential”, or sold to people such as the self-employed who would never be able to claim.
• Inefficient – with claimants facing lengthy delays or complicated claims procedures.
The then Financial Services Authority stated that sorting out PPI as one of its priorities when it took over the task of regulating the general insurance industry
The FSA began imposing fines for PPI mis-selling in 2006, starting with a £56,000 penalty for the Regency Mortgage Corporation. Regency, the FSA said, had sold PPI to “right-to-buy” mortgage customers who would not have been able to claim, or who already held insurance.
Many more followed; with Liverpool Victoria Banking Services fined £860,000 in 2008 for adding PPI to many customers’ loans without their knowledge. Alliance & Leicester was fined £7m, with the FSA ruling that its staff had been trained to “put pressure on customers” who questioned the inclusion of PPI in their quotation.
The PPI scandal escalated in 2008, after Which? magazine reported that one in three people were sold “worthless” policies due to their non qualified status in event of the need to make a claim.
The compensation battle
Faced with this evidence, an army of consumers attempted to claim compensation from their financial providers. Successful claims could be based on several factors – such as proving that you were out of work when the policy was bought, or worse, that you were self employed. A claim could also be mounted if the bank never provided the right paperwork.
The answer’s no, now what’s the question
Some banks rejected almost all compensation claims, but customers who were undeterred and took their case to the industry ombudsman were victorious around 75% of the time.
The FSA brought in a new regime for PPI sales it stated:
• PPI could not be sold until at least seven days after the loan was agreed.
• Borrowers must be given a personalised quote, detailing costs and cover.
• Customers had to be told in writing that PPI was an optional extra.
• PPI sellers had to state how many customers were successful in claiming on their policies.
The banking industry argued that it was unfair to expect it to impose these new standards retrospectively. The issue came to court in January, when the British Banking Association (BBA) launched a judicial review in the hope of establishing this point, but in April it suffered a landmark defeat at the high court.
This ruling forced the banks to reopen thousands of claims for PPI mis-selling, and also trawl through their past PPI sales to find customers who deserved compensation. The corollary of this is now well known.
What costs to the banking industry?
The PPI scandal is set to cost the industry more than £50bn after all claims are investigated and settled, but billions are likely to remain unclaimed after the deadline passed on the 29th August this year. The final figure could well be more than £50bn due to the delay in processing the surge of claims presented running up to the deadline. Below we publish the latest figures by banking group:
Claims management companies (CMCs) good cop or bad cop?
To banks, they are a herd of unscrupulous amateur unqualified companies that have cost them and other institutions billions of pounds.
To those they have helped, they are a band of small businesses that have won consumers large amounts of compensation, and through their tenacity removed the incentives for financial groups to sting customers in the future.
Claims management companies, or CMCs, have played a key role in lifting the total cost to banks of mis-selling Payment Protection Insurance (PPI) by a substantial amount. Love them or loath them they certainly provide a service and assist their clients through the complex area of making claims, claims that may have otherwise been impossible to win on a do it yourself basis.
When battling with huge financial institutions it’s good to have knowledge on your side, unfortunately, this knowledge is rarely available on Google, sometimes it’s better to pay a little for success or risk a lot and get no results. With the change of regulator from the Ministry of Justice to the Financial Conduct Authority, all regulated CMCs must process UK regulated claims on a no win no fee basis so if they fail, and they rarely do, you don’t pay anything.
The future
There are still many complex areas where it is possible to make claims and as we are the Timeshare Consumer Association it would be remiss of us not to mention timeshare claims. This is definitely an area where the do it yourself approach will fall over at the first fence.
Timeshare claims are so extremely complex that you really need expert assistance. Most claims revolve around breaches in legislation thus in many, if not all, cases trained lawyers are needed to present and win cases. Much the same as PPI (Payment Protection Insurance), lawyers are up against multi million pound resorts and developers a sort of David and Goliath, imagine trying to win that battle yourself? In simple terms there is, and always will be, a place for claims companies as long as there are wrongs to be righted.
For more information regarding this article or assistance in any other timeshare related issues please contact the TCA on 01908 881058 or email: info@TimeshareConsumerAssociation.org.uk