Banking industry hopes to draw a line under the PPI saga

Jonathan WatsonMonday 20 April 2020

The payment protection insurance (PPI) scandal is among the biggest ever to affect the UK financial services sector, according to the think tank New City Agenda. The organisation calculates that over £53.5bn has been set aside so far to pay redress to consumers and to cover administrative costs - more than five times the cost of the London 2012 Olympics and almost £800 for each person in the UK.

‘Major banks have only made contact or received complaints from around half of the consumers they sold PPI to since 2000,’ says Dominic Lindley, Director of Policy at New City Agenda. He explains that banks are paying redress relating to around 80 per cent to 90 per cent of the complaints they receive about PPI policies.

If this all played out today, it would be somewhat easier for regulators to pin the blame on senior individuals in whose areas of responsibility the wrongdoing took place

Jan Putnis
Head of the Financial Regulation Group at Slaughter and May

Millions of people were mis-sold PPI. It was an insurance scheme that was added on to mortgages, credit cards, business loans and other types of credit and was meant to cover people in the event of illness, accident or unemployment. As banks and lenders failed to explain to customers what their PPI covered, many were mis-sold the policy.

Consumers had until the end of 29 August 2019 to complain to their bank about PPI. If their bank rejects their complaint, consumers then have six months from the date of the bank’s response to take their complaint to the UK’s Financial Ombudsman Service.

This may not be the end of the story. The claims management companies who have been pursuing PPI compensation claims on consumers’ behalf may now launch claims against the professional advisers of those who have missed their opportunity to claim. ‘This means that solicitors may face allegations that they should have made (or advised on the opportunity to make) a PPI claim and that, as it is now too late to do, the solicitor should pay compensation for the lost opportunity,’ says Jane Williams, a partner at Clyde & Co who specialises in professional indemnity.

How could this happen on such an enormous scale? ‘It was a classic example of groupthink,’ says Jan Putnis, former Newsletter Editor of the IBA Insurance Committee and Head of the Financial Regulation Group at Slaughter and May. ‘Many people thought that a particular business model was acceptable because it was “legal”, or believed to be,’ he says. ‘Although that judgment, of course, with the benefit of hindsight, was a very questionable one.’

‘People were sold a loan with PPI and the premium was added onto the loan,’ says Lindley. ‘When they refinanced the loan, they got a tiny refund on the PPI policy but were then sold another PPI policy on top. They ended up reaching a stage where they had refinanced a few times and owed the bank an awful lot of money, but a significant portion of it was to do with the cost of the PPI, not the money they actually borrowed.’

Putnis explains that sometimes PPI was sold with the loan regardless of whether the person needed it, and regardless of whether it met the person’s needs. ‘And it was also inappropriate, in that pricing was not transparent,’ he says. ‘The customer didn’t know how much of the cost was the premium and how much was the commission.’

Banks are now hoping to move on from the PPI scandal. This may be easier said than done. In October 2019, RBS confirmed that it had earmarked another £900m to pay future successful PPI claims after more complaints were filed in the run-up to the deadline than expected. Katie Murray, Chief Financial Officer at RBS, recently said on a media conference call that ‘it would be a very brave [financial director] to say that the line was completely drawn under it’.

While the banks have had to shell out impressive amounts in fines, it appears that no individual bankers have been prosecuted or even held responsible for the scandal. The only senior executive fined by a UK regulator over PPI is the Chief Executive of furniture retailer Land of Leather.

One reason that very few individuals have been pursued by the regulators over PPI, says Putnis, is that almost all of the wrongdoing took place under the UK’s old Approved Persons Regime, rather than the current Senior Managers and Certification Regime. ‘Under the Approved Persons Regime, it was relatively easy for someone who was very senior to say PPI mis-selling wasn’t their responsibility, because the wrongdoing was committed by junior people,’ he says. ‘If this all played out today, it would be somewhat easier for regulators to pin the blame on senior individuals in whose areas of responsibility the wrongdoing took place.’

That said, Putnis believes that it will always be very difficult for regulators to pursue individuals, particularly senior individuals who, unlike most corporates, will fight for their professional lives. ‘You have to be very sure of your evidence as a regulator to spend time and money pursuing an individual,’ he says. ‘It is easier under the Senior Managers Regime to take action but certainly still not easy,’ adds Lindley.

Could such a scandal happen again? ‘PPI has been such a disaster for the industry that many would now think that anything with faint echoes of it, even conceptually in terms of the way that products are sold, is far more likely to be noticed and prevented nowadays,’ says Putnis. ‘However, that may be a naïve assumption.’