The banks have been comprehensively routed in the courts, and been publicly exposed in the most blatant stinking mis-selling of overpriced insurance to people who didn’t want it, didn’t understand it, and to people who weren’t even eligible to claim on it. So why are the banks going to draw out their humiliation with an appeal over Payment Protection Insurance (PPI)? The reason has little to do with PPI itself, and everything to do with something much more fundamental to the industry. The banks need to protect their right to do the wrong thing.
Regulation in the UK has been like a television game-show. The competitors – the banks, investment companies, insurers and the like – get to keep everything they can grab until the clock runs out. Gutless regulation and enforcement in the UK spends years investigating a rip-off, and then requires rippers-off to stop the ripping and pay fines and compensation that are a fraction of the ill-gotten gains. Leaving them to pocket the balance. A fact that is clear from the paltry fines imposed by the FSA.
This allows the rippers-off years of making profit, and then moving on to their next rip-off. Already a new variety of insurance “Accident, Sickness and Unemployment”, which seems to be closely related to PPI, is being marketed.
It is the “game-show regulation” that the British bankers want to salvage. In the PPI judgement of April 2011 the High Court backed the requirement from the FSA that the Financial Services Industry must not only stop perpetrating the PPI rip-off, but must compensate all victims, including those who haven’t complained, from the start of their ripping.
The banks will fight to hold on to their historic right to be able to do things that are plainly wrong, on the basis that
- They didn’t break the rules, and can keep all their profits up to the time the rules are changed.
- They only have to compensate people who complain. Those who don’t complain, either because they don’t realise they have been ripped off or because it simply isn’t in their nature to complain, can get stuffed.
Was it obvious that PPI was being sold in a “wrong” way? Quite apart from the mis-selling of PPI to people who weren’t eligible – including the self-employed and those with pre-existing medical conditions - the sheer blatancy of the rip-off is evident from the astronomical profit margin. And the fact that the actual cost to the consumer is more than double the true cost of the insurance.
Companies that sell PPI (the “distributors”, such as the banks) to the customer don’t provide the insurance, they just take a generous commission. The actual insurance is provided by underwriters, insurance companies, who take less than 50% of what the consumer has paid. The following extracts are from the Competition Commission’s report of July 2008:
- In 2006 customers in the UK paid £4.4 billion in premiums [Gross Written Premium, GWP] to be covered by PPI policies.
- Distributors are contractually entitled to a percentage of this GWP - the amount of money paid by customers, net of insurance premium tax - as commission, to cover expenses and contribute to profits. Typical commission rates are 50 to 80 per cent for PLPPI [personal loans] and CCPPI [credit cards] and 40 to 65 per cent for MPPI [mortgages].
- The remaining GWP is passed to the underwriter to cover expenses, including claims. We found that between 11 and 28 per cent of GWP is paid out in claims, depending on the product.
The underwriters, who would pay any claims made on the policies, are so confident that even their minority share of the GWP is more than they are likely to need entered into an agreement to pass some of it back to the distributors:
- In the event that claims levels are less than expected, the resulting profit is generally split between the underwriter and distributor according to an agreed profit share percentage; typically 90 to 100 per cent in favour of the distributor.
- A separate profit share arrangement will typically apply to any investment income earned by the underwriter on premium income and may also apply to tax benefits on life business.
The Return on Equity (RoE, a measure of how profitable a business is) of banks, which are among the most profitable of organisations, is typically 15-25%. For PPI the RoE is 490% (four hundred and ninety, in case you thought this was a typing error). Twenty times more profitable, in an industry already infamous for excessive profit!
- We calculated that the 12 largest distributors made profits after tax in excess of the cost of capital on PPI of £1.4 billion in 2006, representing a return on equity (RoE) of 490 per cent.
The banks aren’t fighting to prove they weren’t ripping off their customers selling PPI. The fightback is to protect the right to walk away with the profit once they’ve been caught out. That PPI is a rip-off is something even a banker would feel ridiculous denying. This must be clear even to them from the rate at which complaints against them are being upheld:
- Black Horse Ltd (part of Lloyds TSB) - 89%
- The Co-operative bank - 88%
- Lloyds TSB - 88%
- MBNA - 86%
- Firstplus plc (part of Barclays) 86%
- Tesco personal finance - 84%
- Barclays - 75%
- Natwest - 72%
- RBS - 69%
Paying back £5billion plus in ripped-off PPI premium is something that would hardly dent the bonus budget. But having to pay back ripped-off money from the past, and just as bad, also paying back money to people who haven’t even complained would set a dangerous precedent. According to the High Court judgement of April 2011, the number of people who have been tricked into thinking they weren’t ripped off, and people who simply didn’t get round to complaining could amount to millions:
There were between 3.8m and 11.3m non-complainant customers who might be contacted, and 15m who might be assessed for initial mailing by the firms.
Now that would hurt! The British Bankers’ Association makes this clear in their statement
“we believe (and continue to believe) that the FSA is effectively creating a precedent which permits it to apply new rules to previous sales – even where those sales were regulated by other FSA rules.”
It would hurt because it sets a dangerous precedent for the banks, and a hopeful one for the rest of us, that would
1) threaten reopening £billions of mis-selling cases from the past, not only PPI related
But far worse than that for the bankers - and a shining ray of hope for us - it would change the whole basis of the financial industry:
2) make it unattractive to continue with the currently ongoing chicanery, such as rip-off pensions, which are many many times bigger than PPI. As they would have to disgorge all their ill-gotten loot, rather than just what they took after being caught.
3) force banks and insurers to compete on quality products and services to earn their profits, rather than collude on rip-offs.
Three things that are to Financial Services like garlic, sunlight, and a wooden stake to a vampire.
PPI will doubtless return to the spotlight in a few months time when the banks appeal to the Supreme Court, as they did with the rip-off overdraft charges. They will find an expensive lawyer who will finesse the words of the law, trampling on its spirit, as they did with the rip-off overdraft charges. Influenced by the quality of the judges’ lunch and the humour of their spouses, their honours may come up with a decision as perverse as they did with the rip-off overdraft charges – in which they decided that regardless of the rip-off it was not the job of the Office of Fair Trading to investigate whether the banks were trading fairly.
"This appeal involved a relatively narrow issue. The Supreme Court had to decide not whether the banks’ charges for unauthorised overdrafts were fair but whether the OFT could launch an investigation into whether they were fair."
British Supreme Court judgement in November 2009 on rip-off bank charges, in which the OFT having won its case through the High Court, ultimately lost in the Supreme Court.
Could it be that this is going to change? Could it be that the regulators, legislators and courts have found their courage? Alas, history suggests probably not. But who can tell!
Bankers carefully cultivate the illusion that their massive profits come from being really very clever. The reality is that billions of profits come from brutish scams such as
- Payment Protection Insurance
- Net Credit Interest (the gap between high loan rates and derisory savings rates)
- Rip-off pensions
- Unauthorised overdraft charges
Which is all necessary, the bankers tell us to the nodding of government ministers past and present, to keep the economy going round.