Sky Views: The hideous US-style compensation culture of the PPI scandal is here to stay

Sky Views: The hideous US-style compensation culture of the PPI scandal is here to stay

In the early hours of this morning, one of the shabbiest episodes in recent British business history came closer to an end.

The Financial Conduct Authority's (FCA) deadline for people who want to file a compensation claim for being mis-sold Payment Protection Insurance (PPI) expired at midnight last night and no new claims may be filed.

It comes as a huge relief, frankly, as few people emerge with credit from this saga.

The banks and some building societies, clearly, are the biggest villains for having mis-sold an estimated 64 million such policies between 1990 and 2010.


Their punishment has been to shell out some £36bn in compensation payments to date and, on top of that, have had to spend several billions more on processing the claims.

Image: PPI compensation pay-outs put billions of pounds into the pockets of ordinary Britons

The lenders compounded this bad behaviour when, in October 2010, their then trade association, the British Bankers Association, launched a judicial review aimed at stymieing rules introduced by the FCA's predecessor, the Financial Services Authority, on how they dealt with mis-selling claims.

That enabled them to delay compensation payments.

One of the few bankers who behaved honourably at the time was Antonio Horta-Osario who, as chief executive of Santander UK, refused to involve the bank in the judicial review and ensured it continued processing compensation claims.

He subsequently became chief executive of Lloyds Banking Group where, in May 2011, he pulled the Black Horse bank out of the judicial review and announced Lloyds would set aside £3.2bn to start compensating customers.

His decision quickly led Barclays, HSBC and Royal Bank of Scotland - in that order - to follow suit. As if to prove that no good deed goes unpunished, Lloyds has had to pay out by far the most in compensation, its total bill going past £20bn, more than double the sum stumped up by Barclays, the next-highest payer.

Yet it would be wrong to say the banks are the only wrong 'uns in this story. The rush to claim mis-sold PPI has created a ghastly claims management industry that has raked in between £3bn and £5bn in fees and commissions from successful claimants.

These glorified ambulance chasers were typically taking around a quarter of every successful compensation pay-out until the FCA capped the amount such companies can extract.

The banks and some building societies, clearly, are the biggest villains for having mis-sold an estimated 64 million such policies between 1990 and 2010. Their punishment has been to shell out some £36bn in compensation payments to date and, on top of that, have had to spend several billions more on processing the claims.

Their nuisance phone calls and text messages have become one of the scourges of modern life but, sadly, they are unlikely to go away following last night's deadline.

There is growing evidence that the so-called "pension freedoms" introduced in 2015 by George Osborne, the former chancellor, have led to some people being poorly advised in accessing their pension savings.

As more people realise they have lost out, as a result, their compensation claims should keep the claims management companies going for years to come. The hideous US-style compensation culture fostered in this country by the PPI scandal is here to stay.

Such claims management firms could not exist without the greed of many ordinary people who they aided and abetted.

There is no doubt that a fair chunk of compensation claims were made dishonestly in respect of policies that never existed.

The banks, thanks to their poor record-keeping, have had little option but to pay up in many such cases. This has been a cause of deep frustration to those at the top of the banks.

John McFarlane, the former Barclays chairman, told the Mail on Sunday in September last year: "It is almost inconceivable to think that £50bn was mis-sold. The percentage of fraudulent claims is enormous. We have turned portions of Britain into fraudsters."

So this has been a tawdry episode in many ways.

Image: 'We have turned portions of Britain into fraudsters,' said former Barclays chairman John McFarlane

But has any good come of it?

In some ways, yes. The torrent of PPI compensation pay-outs have acted as a huge prop to consumer spending when, during the tough decade following the financial crisis, wages growth stagnated.

During the early years of this decade, in which earnings were failing to keep pace with inflation, PPI compensation pay-outs put billions of pounds into the pockets of ordinary Britons, supporting sales of conservatories, new cars and widescreen television sets.

The phenomenon has, for that reason, been nicknamed "people's quantitative easing". It is perhaps no coincidence that, as the volume and value of PPI pay-outs have started to decline, so too have new car sales.

Another good to have come out of this saga is that the banks have received a chastening lesson. No banking executive who has had to sign off on these compensation pay-outs, or has had to administer the claims process in their organisation, will want a repeat of this episode.

It would be nice to think that, in future, lenders will be much more careful in how they interact with their customers and, in particular, sell them products and services.

Another positive is that the claims management industry, after years of encouraging fraudulent compensation claims not just for PPI mis-selling but also for whiplash and bogus holiday illnesses, now faces tougher regulation.

Responsibility for regulating these firms passed earlier this year from the Ministry of Justice to the FCA while, at the same time, tougher rules have been brought in.

It would be nice to think that, in future, lenders will be much more careful in how they interact with their customers and, in particular, sell them products and services.

Senior staff at claims management firms are, for example, now subject to the FCA's Senior Managers Regime - under which senior managers at banks, insurers and fund managers are liable for fines and bans for failings at the company on their watch.

Over time, hopefully, the claims management industry will clean up its act as a result and the cowboys be weeded out.

It would be unwise, though, to think that this will the last big scandal to engulf the financial services sector. Ultra-low interest rates are strangling profitability at the banks while the impending introduction of caps on charges that can be levied on bank customers who go into the red without permission will gnaw away at earnings.

That will force lenders to seek alternative revenue sources.

Meanwhile, recent years have seen a plethora of new products and services, such as the Personal Contract Plans (PCPs) increasingly used by people buying a new car. These, it has been suggested, could be the source of the next mis-selling scandal. So, too, could pensions advice.

This century has shown that financial crises tend to be repeated when those who remember the last one have retired. It falls to the next generation of senior bankers to prove the same does not apply to mis-selling scandals.

Sky Views is a series of comment pieces by Sky News editors and correspondents, published every morning.

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