PPI, payment protection insurance, is an insurance that provides the ability for consumers to insure repayment of loads if unforeseen circumstances should occur such as the death of the borrower, the borrower’s loss of a job, a borrower’s suffering a disability or illness or other occurrences preventing the earning of income necessary to pay the debt. Especially in the United Kingdom, PPI is commonly sold as an attachment to the loan. The purpose of PPI is to insure a variety of types of consumer loans that include finance company loans, automobile loans and home mortgages. Although the insurance is purchased by the borrower, the paid benefit of a claim goes to the creditor.
The PPI Scandal
The miss-selling scandal began in the 1990s when banks were caught unready for the development of new and smaller creditors. These creditors offered cheaper loans to borrowers no matter what their credit history was. As the prices of those loans became lower and lower, banks saw PPI as a means of bolstering their profits. The banks accomplished this in the following ways:
- They added on PPI to the sale of loans without giving the borrower any choice.
- The banks told borrowers that they could get a better loan rate if they took out this insurance with the loan.
- Borrowers were told by the banks they could get free insurance for a period of time, and that period of time actually turned out to be only one month. At the end of the period of time, it was the borrower’s responsibility to either cancel the insurance or take on the payments for the insurance.
- Another travesty was banks selling the borrower the insurance without their knowledge. Furthermore, the payment amount of the loan wasn’t seen by the borrower on their statements.
The problem was the aggressive way banks sold the PPI product coupled with an overpricing of the insurance. Public awareness of this has led to a growing number of PPI complaints and banks having to increase their provisions. Currently, the amounts being paid out don’t yet appear to be slowing sufficiently.
Did the causes of the scandal lie primarily with the banks? There were a number of other factors leading to the scandal:
- It was an age of few regulations to protect the borrowers.
- At that time, regulators were slow, and there were no rules in place that the banks were breaking.
- Since the banks knew the selling of PPI was widespread, each of them saw no reason to discontinue selling PPI.
- Overspending during the boom years resulted in increased borrowing.
- The government was totally unaware of the PPI nightmare building.
- Regulators were aware of the PPI nightmare, but were powerless to do anything about it.
Changes That Should Improve PPI
- Regulation is now getting a lot tougher.
- The consumer protection arm of the FSA is set to become the financial conduct authority next year, and they are cracking down on hard-sell practices.
- Retail banks are moving away from incentive target practices for their staffs.
- There is also a regulation clampdown on interventionist products and actions from regulators to get hold of these scandals at earlier stages.
- The British Bankers Association now ensures that services and products will be aimed at the consumer’s best interests in the future.
It now appears that the retail banking industry is trying to clean up its act. Banks are dropping product driven sales targets and admit that PPI was sold aggressively. The hope is with the new regulation environment there will never again be another miss-selling scandal like the PPI scandal.
PPI Claims Continue with No Slowing Down?
With steps being taken by claims management companies to get customer PPI compensation, the cost of PPI compensation for banks has unexpectedly spiked. An increase in the number of PPI claims has forced the four biggest United Kingdom lenders to designate more for pay-outs. Barclays, Lloyds, HSBC and Royal Bank of Scotland allotted a total £1.54bn third quarter provision. This was a 41 percent increase or over £447m of the same period in 2013. Even though claims were projected to slow down, the miss-selling continued.
In the first eight months of 2013, the Financial Conduct Authority reported pay-outs dropped sixteen percent when compared to 2013’s same period. Over £300m has been paid out each month indicating a slower decline than in 2013. In the past four years, the big four banks of the UK put aside a total of over £22bn and spent £5bn. So far in 2014, they have put aside £3.3bn.
Of all the money put aside since the start of the miss-selling scandal began, Lloyds accounts for slightly over half. Lloyds reported that in October the number of claims increased from the claim management companies between the 2013 second and third quarters. Based on a continuation of the same rate of decline, they predicted a possibility of their having to face another £600m in provisions in the last three months of 2014. However, they claimed indications were seen by them in October of a slowdown in claims.
On the other hand, Stuart Gulliver, chief executive of HSBC, pointed out at the start of November that “a more strident approach” had begun by claims management companies as they dug into the customer’s histories. He also said, “There has been a very significant step up in the number of claims from claims management companies.” If we are to believe Gulliver is correct, the PPI claims have not slowed down.
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