That is the bill facing the banking industry if it loses the Payment Protection Insurance (PPI) judicial review now underway. But even if it wins, the cleanup operation – and the impact on retail banks’ pricing strategies – will put a huge burden on the industry for years to come.

Mis-Sold PPI

The High Court judicial review into allegations financial institutions mis-sold Payment Protection Insurance (PPI) presents banks with a dilemma: reputational risk and a mountain of complaints if they win; reputational risk, a mountain of complaints and a hefty compensation bill – of up to £4.5bn[1] – if they lose.

The only way to tackle the problem, therefore, is head-on.

Stage 1: Root cause analysis

Key to how banks’ resolve their PPI issues is a rigorous approach to ‘root cause analysis.’ This analysis involves a dual approach:

i)  A high level view to determine whether the institution had weaknesses in its sales processes.


ii) A review of the complaints received, along with the sales documentation and data that resides within the firm’s internal systems, to investigate whether there are patterns of recurring symptoms. This will help banks generate a heat map of their books to identify, for example, whether certain channels or client categories are likely to require some form of treatment or redress.
Stage 2: Customer remediation

Armed with their root cause analysis results, institutions can calculate the extent of their potential financial exposures, and plan how to move forward. This could be:

i)  Proactive – Contact customers, including those who have not made a complaint, and provide compensation.


ii) Reactive – Set aside sufficient financial provision and prepare the operating environment to cover any complaints received, and ensure customers are treated in the way the firm has identified they should be from the root cause analysis.
Stage 3: Operational response

Whatever the outcome of the judicial review (JR), the PPI issue will not disappear:

i) Lose the JR – financial institutions will be tied up with remediation for many years, as they process the mountain of complaints and claims, and redress affected customers.


ii) Win the JR – banks will still be burdened by a huge volume of complaints and claims that they need to work through.
Past business reviews are costly and time consuming. Firms may have 100,000 complaints, with complex complaints taking two or three days to process. As a result, such projects can often require 1,000 people to manage the complaints handling.

There is a risk of institutions’ day-to-day business being affected as branch networks and call centres become bombarded with aggrieved customers … unless firms implement an operational plan to ensure the complaints and claims process is made fast and efficient.

This could take the form of:

New process design for complaints handling.


Complaints handling training. Systems enhancements.

Enhanced governance and management information reporting to ensure the process is managed correctly.

Compliance monitoring.


The last thing a bank wants to do is hobble current business activities by tying up resources rectifying past issues. Remediation is not a core bank function. It makes sense, therefore, to outsource the work to a specialist organisation with the operational support, infrastructure and process expertise to contact millions of customers, handle the complaints and manage the redress programmes. The bank still maintains governance of the process, but is freed to concentrate on what it does best.

Be prepared

Prior to announcement of the judicial review, the FSA had stipulated that financial institutions should provide them with a report of the findings of their business review in Q1 2011, and start putting it into effect in the third or fourth quarter.

Until the review’s outcome is known, it is unclear whether the FSA will stick to that programme. Nevertheless, it remains in firms’ interest to undertake the root cause analysis work and implement an appropriate operational response. For one, it means you will be prepared for whatever regulatory decision transpires. But more importantly, it ensures you can tackle the PPI workload in the most efficient way possible, and minimise its impact on other areas of your business.

[1] According to the British Bankers’ Association’s presentation to the High Court, Banks challenge regulator on PPI rules by Jane Croft, Financial Times, January 25 2011.



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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.