Another mis-selling scandal comes to a close in the UK with the Payment Protection Insurance (PPI) debacle reaching closure. The blame for this scandal lies at the doors of the banks. Despite the attempts of the trade association, the British Bankers’ Association, to halt the acceptance of liability, the courts have decided that these policies were mis-sold and corrective action is, therefore, needed. The banks themselves have held their hands up and in some cases even apologized to customers for this awful chapter in their history.
When PPI was originally launched there was no real reason for concern. The product was designed to protect payments for people in work who had taken out loans. The insurance would cover their payments if they were ever made redundant or lost their jobs. The problems developed when the banks started selling this insurance to all customers, regardless of their needs. Self-employed people were sold the policy and so were retired people, those with no jobs and those where there are obvious exemptions and, therefore, no likelihood of the policy paying up.
These products are not cheap but, more importantly, there have been high commission payments made to those who sold it. Greed has therefore taken over, underpinning sales targets to maximize the profits of participating in certain business areas.
This practice extends to other consumer areas too. Those selling mobile phones and white goods and even cars find themselves in a position where they can alter or reduce the cost of the capital item if the consumer takes out (what is often irrelevant and expensive) the insurance for something that they would never be able to make a claim for.
Financial services is of course far more heavily regulated than other areas, particularly in the UK. Changes proposed under the Financial Services Authority’s Retail Distribution Review mean that many areas of financial services will be rid of commission influencing product sales from 2013. Advice will have to add value, be relevant and the providers of financial services would have to demonstrate that they have their customers’ interests at the heart of the relationship or transaction. Selling products that are inappropriate or irrelevant will, thankfully, stop. The banning of commission will help this but corporate responsibility is also key to this being successful.
Other historic mis-selling scandals in the UK have shown similar trends to the PPI debacle. A good product, which has been well presented for particular people in certain market sectors has been contorted and sold to others. Usually this is driven by the ability to sell and for commission and greed outweighing responsibility towards the customer. In the past, we have seen mis-selling of endowment policies, personal pensions, precipice bonds and now PPI policies are grabbing headlines. Consumer bodies and others along with the media are quick to act and the regulator is getting better. Moving forward, it is important that these episodes are prevented or nipped in the bud before they become an epidemic.
The next phase of PPI case is compensation. Like other areas in the world, there are now organizations set up to help people with claims. They are not necessarily well regarded with slang titles, such as ambulance chasers, associated with them. These are organizations that are proactive in offering a no fee, results-based service on successfully obtaining compensation for their customers. If you look specifically at the PPI compensation, banks have all confirmed that they will be paying compensation. There are helplines for people to find out how to make their claims and to see whether they have a claim or not. Banks have made significant provisions with some commentators suggesting figures ranging between £6 billion and £10 billion to cover compensation.
In the UK, there is a Financial Ombudsman Service, which deals impartially with all consumer complaints relating to financial services. A third of all complaints received apparently are now from third-party organizations helping their customers with the process. This is not a good statistic to share and perhaps some focus needs to turn to these sorts of organizations.
Banks have belatedly put their hands up and will now be employing hundreds of people to oversee the claims for compensation. Let’s hope that this passes off as a good experience for their customers and let’s hope that they resist the temptation to sell them something inappropriate to try and keep hold of the money.
Nick Cann is chief executive, Institute of Financial Planning, UK.
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