Earlier this week, British banks abandoned an appeal against measures introduced by the Financial Services Authority (FSA) in 2009 banning the sale of single-premium PPI with loans.
PPI (payment protection insurance) is a product that was sold by lenders alongside various forms of credit. It is designed to protect consumers in the event that they are unable to pay a debt, usually in the event of accident, illness or redundancy.
Whilst some consumers have no doubt benefited from PPI, it is the banks that have profited most. Indeed, the margins the banks have made on PPI have in many cases exceeded what they make in interest on loans, credit cards and mortgages, and this has been reflected in the fact that their sales teams have been receiving serious commission for getting people to take PPI. Unfortunately, many of those people didn’t need PPI, didn’t want it, or had no idea they were paying for it!
The history of the PPI debate dates back to 1998, when consumer magazine Which? suggested that PPI represented poor value for money, due to the cost and the common exclusions (things not covered by a policy).
In early 2005, the FSA announced it would be reviewing the way in which PPI was regulated, and the Citizens Advice Bureau issued a ‘super complaint’ to the Office of Fair Trading (OFT) regarding PPI sales. Towards the end of the year, the FSA published a report identifying problematic selling practices and compliance issues in the PPI market.
In 2006, the FSA fined a number of smaller lenders for mis-selling PPI, and ‘enforcement procedures’ were imposed on 24 firms. Subsequently, the OFT announced that it would refer the matter to the Competition Commission, which it went on to do the following year. Around the same time, a number of large PPI providers were fined by the FSA for unfair treatment of customers.
In 2008, the Competition Commission published 3 papers on the PPI issue, whilst the FSA imposed further fines and introduced ‘comparative tables’ for PPI. Which? carried out new research, finding that as many as 2 million consumers had been paying for policies that they would never be able to claim on, and that 1.3 million incorrectly believed that taking PPI meant their applications for credit would be accepted. Towards the end of 2008, Alliance & Leicester were fined £7 million for mis-selling PPI.
In 2009, the Competition Commission recommended that that firms selling loans shouldn’t be able to sell PPI as a bundled product at the same time. Barclays lodged an objection to this, but in May 2009, the FSA made the ban official.
In October 2010, the British Bankers’ Association sought a judicial review of these measures, and a High Court case began in January 2011. Last month, the High Court ruled against the banks, and they have now announced that they won’t appeal.
On one level, this sounds like good news for consumers – RBS has set aside £850m to compensate people for mis-sold PPI, whilst Barclays has set aside £1bn and Lloyds £3bn. However, banks are already beginning to increase their charges in an effort to balance the books. As things stand, it’s hard to see the public’s faith in the banking system being restored any time soon.