The widespread mis-selling of Payment Protection Insurance (PPI) occurred for a whole host of reasons, from a failure on the part of the bank to make clear to customers that the policy was optional, to customers not even being made aware that they were purchasing it.
The resulting fallout has not only continued to damage the banks’ credibility in the eyes of customers, especially in the light of controversies over bankers’ bonuses amid the recent economic slump. That’s because the PPI scandal has also cost the banks plenty of cold, hard cash, with it being revealed at a hearing in January that the banks could be left some 4.5 million out of pocket simply as a result of implementing recent proposals put forward by the Financial Services Authority (FSA).
Those FSA guidelines, which came into force last December, called for banks to contact those customers who had potentially been mis-sold PPI and, if they had, to pay out appropriate compensation. That resulted in the launch by the industry – represented by the British Bankers Association (BBA) – of an ultimately unsuccessful High Court judicial review that aimed to alter the rules, which applied even in cases where no complaint had been made.
In that hearing, Lord Pannick QC, for the BBA, had told Mr Justice Ouseley that it would cost the banks an estimated 3.2bn to implement the proposals. That was on the basis that there would be a 20% take-up by those contacted who had purchased PPI policies since 2005. In addition, it has been estimated by the FSA that PPI providers may have to pay out as much as 1.3bn in compensation in response to new complaints received over the next five years.
The bank’s challenge had been brought given the retrospective nature of the new rules, as they did not apply simply to complaints about new PPI policies taken out since December – something which Lord Pannick had described as “unlawful”. Nonetheless, the BBA decided against an appeal after the rejection of their claim, with a series of banks subsequently setting aside money to pay out as PPI compensation.
Barclays, for example, announced in May after the April High Court decision that it would set aside 1bn to cover both customer redress and administration costs. The new chief executive at Lloyds, meanwhile, Antonio Horta-Osorio, confirmed that the bank would be ceasing its own battle with the FSA and increasing the amount that it put aside for PPI compensation to 3.2bn.
Further, Royal Bank of Scotland (RBS) also obliged with the decision and confirmed that they are setting aside a further provision of 850m for affected clients. This is on top of the 100m already paid to customers in compensation. In the meantime, Co-op Banks equally apportioned 90 million to pay out mis-sold PPI policy holders.
Obviously the PPI scandal is a big blow to the financial industry in the UK. According to analyst, it will cost the banks more than the FSA initial estimate of 4.2bn as it could probably reach 8bn to more than 10bn to correct the biggest blunder they have committed to their clients.
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