‘The costly PPI backlash has proved something of a watershed’ writes Jeff Salway
PAYMENT protection insurance is a decent product. Designed to cover loan repayments if borrowers are unable to work because they lose their job or fall ill, it can help keep the wolf from the door and ease the stress of unemployment.
Perhaps one of the great ironies of the PPI mis-selling scandal that has unfolded over the past six years is that, amid the mass of pointless, opaque products that banks offer, PPI should have been easy to sell.
But greed kicked in. The banks started flogging the policies to customers who wouldn’t even be entitled to make a claim on them. They conned people into taking them out by implying that without taking the insurance they wouldn’t get the loan or credit it was designed to cover. They hiked premiums to levels well above those charged by specialist insurers selling standalone PPI.
With remuneration based heavily on hitting sales targets, branch staff stopped at nothing to flog the policies.
Yet for once, they were selling a good product. Compare it to the card and identity theft insurance sold by insurer CPP, which has 4.5 million policyholders in the UK and was last week ordered to review past sales for evidence of mis-selling.
Unlike PPI, these policies are largely useless, offering a protection against fraud that is already available free of charge from card issuers. CPP’s shares have been suspended and the company faces a potentially crippling compensation bill once the way is cleared for consumers to lodge claims.
The widespread mis-selling of PPI hasn’t brought any of the banks to their knees. The costly backlash has proved something of a watershed, however, and it could yet be a turning point if the banks learn their lessons from the sorry saga.
New figures from the City watchdog show that banks paid out almost £2 billion in compensation to PPI mis-selling victims last year alone.
The costs to the individual banks who thought they’d got away with flogging the insurance to customers who didn’t want or need it continues to snowball. Lloyds Banking Group put aside £3.2 billion to cover the cost of compensation and last week revealed that it is to claw-back millions in bonus payouts to executives – including former chief executive Eric Daniels – who presided over the rampant mis-selling of PPI.
The hope is that Lloyds has set a precedent in reflecting some accountability in executive payouts. The target-driven remuneration culture of high street banks is at the heart of all that is rotten in the industry.
It’s taken billions of pounds in compensation payouts for PPI to become a factor in pay and bonuses. But linking performance to pay will be key if banks are ever to reform their practices to deliver what their customers really want.