PPI – A sign of the mad, bad world
When the sale of PPI was at its peak the banks and finance houses were working in a market where personal loans were being sold at a loss as competition had driven the prices down and demand for funds driven the wholesale prices up. Banks and Finance Houses were prepared to sell these loans at a loss because they were able to sell Payment Protection Insurance at such a high premium, with very little chance of a claim against them due to the convoluted terms and conditions. Staff were heavily incentivised to sell PPI because that was where the profit came from and as a result hard-selling took place.
Consumers actually got loans at lower interest rates than they should have, so a good proportion of customers (primarily those who didn’t take out PPI) were getting a good deal, so it wasn’t all a terrible rip off for bank customers.
Hopefully the other banks and Finance Houses will follow the lead set by Lloyds Banking Group and draw this sorry episode to a halt. (UPDATE: All the other major banks have followed suit with RBSG writing off £850m, Santander £538m, Barclays £1bn and HSBC £270m or a total just under £6bn). That doesn’t mean that everyone who claims should get their money back, because there are a surprisingly large number of claims being made by people who either didn’t take out PPI or worse still didin’t even take out a loan. The process of weeding out the fraudulent claims and processing the valid claims will undoubtedly take some time.
What should happen now is that loans and credit cards move to being priced realistically, based on the wholesale market prices and with a reasonable risk-adjusted price. This may be a shock to customers, but at least it will represent a fair price.
The fall out from the financial crisis is that retail banking needs to change, but the changes and expectations need to be not only on the banks’ side but also the consumers.