The cost of the PPI bank scandal to UK citizens can be measured both in pounds and the falling trust that consumers have in their banking institutions.

 

The Cost of PPI

Which? has recently released an opinion to the Parliamentary Commission on Banking Standards that characterized the Payment Protection Insurance scheme as “a poor product that was sold badly.” Which? is a group that campaigns for the protection of consumer rights and offers an independent view on various subjects.

An analysis by Which? showed that UK consumers paid out £50 billion for PPI protection since 1996. The consumer advocate group highlighted numerous examples of lack of accountability and inappropriate sales schemes.

Which? presented evidence at the hearing that showed that Egg pushed PPI schemes with its credit card offers to more than 100,000 customers that earned Egg £16.7 million in premiums. However, 40 percent of telephone sales of PPI violated regulations, according to the Financial Services Authority (FSA).

Major high-street banks mis sold PPI schemes that covered only five years of 25-year loans, but the consumer was on the hook for paying for PPI over the entire life of the loan.

Which? also revealed that Lloyds TBS enjoyed a whooping 87 percent commission when it sold a particular brand of PPI. This commission set a record in the financial services sector.

Loan managers at Alliance and Leicester earned lavish bonuses on PPI sales that were six times greater than selling a loan without PPI. Bonuses were cut by 25 percent if they did not sell at least 50 percent of all loans with PPI included.

Which? also decried the overall lack of responsibility in the PPI scheme. Only one senior executive has suffered an enforcement action by FSA. That person was an executive at a sofa shop named Land of Leather.

“If the banks are serious about wanting to get this problem behind them, as they should be, they have got to engage in the process of sorting out the backlog of compensation claims,” said Peter Vicary-Smith, the chief executive officer at Which?.

In the meantime, UK citizens are starting to shed their respect for elite institutions and are showing distrust.

About 80 percent of people believe that UK banks have not done enough to prevent a future credit crunch, according to data from Which?. Seventy percent of people also believe that banks haven’t improved at all since 2007.

“Five years on from the beginning of the financial crisis, public confidence in the banking industry is at an all-time low, with a series of scandals exposing mismanagement and corruption at the very heart of the system,” said Vicary-Smith.

The most recent Edelman Trust Barometer shows that the public’s trust in banking institutions has fallen to a new low. Only 22 percent of people trust banks, said Edelman, a global PR company.

The culture of banking itself is taking a big hit. Edelman found that 59 percent of UK citizens blame the banking scandals on a toxic internal culture permeating banks.

The trust is gone. In a story related in hrmagazine.co.uk, the chief honcho at a wealth management firm said that the talk around the table at dinner parties and pubs centers on bashing financial services. Bankers are now the least liked people in the room, said the executive. The respect is gone. Another former executive at Citigroup said that “Even if you’re a cashier, your neighbour thinks you caused the recession.”

As unfair as that attitude might be, bankers are paying a price in trust for one scandal piled atop another. People are particularly incensed that nobody in banking seems to be paying a price. First came the outrageous financial meltdown in 2008. That was followed by the Libor rate-rigging scandal that involved some of the must trusted financial institutions in Europe, including Lloyds, Barclays, HSBC and RBS.

Next came the interest rate swap scandal that smashed into 40,000 small businesses, completely destroying some family businesses. Cleaning up that mess may cost banks £10 billion. If that wasn’t enough, the PPI scandal roared down the banking highway and crashed into all the other financial bangers.

These scandals have angered many across the UK. “The culture of tolerating, and even rewarding, any sort of behaviour for profit, hasn’t changed,” said John Greenwood, the head of Creechurch Capital in an interview in hrmagazine. “The alpha individuals get away with murder,” he added.

Greenwood, though, said that he’s starting to see things change for the better. With the public catching on to the lies, the City financial culture will change, he said, even if it’s only change motivated by fear of getting caught.

As the many scandals unravel, some eye-popping numbers around the PPI scheme are becoming known to the public.

For example, The Financial Ombudsman Service (FOS) has been buried by more than 600,000 complaints about PPI since 2000. Nearly half of those complaints have been filed since July1, 2012. Between that July date and the end of December in 2012, 283,251 complaints have been filed with the ombudsman. That was an increase of 110 percent over the previous six months.

Lloyd’s Group was hammered the hardest with 93,454 complaints. Of that total, 42,195 were related to PPI with 86 percent upheld. The Bank of Scotland was hit with 34,434 PPI complaints with 81 percent upheld. Barclays saw 37,883 PPI complaints of which 77 percent were upheld.

The FOS has cautioned PPI complaint filers that the agency is swamped, and the time from filing to resolution is more than one year.

 

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.