Payment protection insurance helps people who suffer accidents or illness or lose their jobs to repay debts. If you have a credit card, you will certainly have been invited to take out a PPI policy. Last week, the chief executive of Lloyds Bank announced that the bank would provide £3.2bn ($5.2bn) to cover claims for improper marketing of these products.
Mr António Horta-Osório is today probably the most unpopular man in the UK financial community. Not because of the misconduct at his bank, which he has only just joined, but because he has acknowledged that misconduct. His competitors feel he has let the side down, and have abandoned their own defence.
In 2005, Citizens Advice made PPI the subject of a super-complaint – a genteel British version of the class action. That organisation had received many protests from struggling borrowers who had mistakenly hoped their policies would give them protection.
A series of regulatory investigations followed. An inquiry by the Office of Fair Trading was followed up by the Competition Commission and the Financial Services Authority. The Competition Commission established that claims paid accounted for less than 15 per cent of the value of premiums written for the principal forms of PPI and that the profits of distributors of the policies averaged 70 per cent of the value of sales. In most cases, a borrower with PPI would find that premiums totalled more than the interest on the loan. The FSA discovered many instances of mis-selling. Some customers believed they could not get credit unless they responded to the sales pitch. Others had little chance of a successful claim because of policy exclusions.
The big British banks have been the principal distributors of PPI policies and have encouraged staff to market them through sales targets or commissions. You might have expected that, faced with such embarrassing revelations, the banks involved would have expressed regret and agreed to put their houses in order. This is not what happened.
Both the Competition Commission and the FSA have extensive legal powers to demand information and to impose remedies for abuse. These are rarely used – since companies under investigation comply voluntarily. But the inquiry into PPI is one of very few cases in which this authority has had to be invoked. Appeals against decisions have been made at each stage, and regulators have been bombarded with fluff in defence of the indefensible.
Last month, British banks lost a court case in which they challenged the FSA’s demand that they identify and reimburse customers to whom PPI has been mis-sold. Since most people do not need to make a claim on an insurance product, they never discover whether the policy they bought actually met their needs.
The new rules will ban the marketing of PPI at the point of sale of credit. This remedy is far from ideal. The moment at which a borrower takes out a loan is the best time to examine possible difficulties in repayment. People who take out small personal loans, or struggle to pay credit card bills, are unlikely to be financially sophisticated. A good PPI policy might be of real help to many borrowers but the existing products have been so bad that most people would be better off without them. Much the best outcome would be that providers offered good advice and products that provided value for money, but this is virtually impossible to enforce by law.
Market economies are always vulnerable to chancers and spivs who sell overpriced goods to ill-informed customers and seem to promise things they do not intend to deliver. If such behaviour becomes a dominant business style, you end up with the economies of Nigeria and Haiti, where rampant opportunism makes it almost prohibitively difficult for honest people to do business. Our prosperity depends on a self-enforcing culture of ethical business values, in which traders value their reputation and seek to develop long-term commercial relationships. That is the culture in which banks used to operate: it is time they did so again.