Payment protection insurance policies were designed to protect borrowers from loan default in event of loss of job, illness or even death. However, greedy banks ended up selling more than 20 million policies to individuals who did not need it, or were not eligible to buy it, or did not know that they were buying such a policy and paying for the same.
A simple study by the Citizens Advice Bureau proves that these policies increase the cost of the loan by 20 to 50%. Cost of PPI for an £11,000 unsecured debt works out to around £5133. This amount would be payable along with the EMI. The cost of PPI for a car hire agreement worth £5059 works out to £2157.
The process of cheating customers and earning profits was rampant till 2005. The FSA stepped into the picture and started regulating the sale of these policies by high-street banks. The FSA started awarding compensation where misselling was proved. Till date, 1.5 million individuals have filed complaints or claims for PPI policies. An equal number of individuals remain unaware of their rights regarding mis-sold PPI policies
The seven-year-old battle ended after the FOS issued an ultimatum demanding banks to step up and compensate victims of mis-sold PPI policies. The dispute initiated by the British Bankers Association fizzled out after Barclays, RBS and HSBC withdrew their participation. FSA looks forward to a situation where PPI complaints will be handled in an improved manner where customers will not face unnecessary delays in obtaining responses from banks for their complaints.
Misselling of PPI policies is going to hit profits of big banks badly. Lloyds, Barclays, RBS and HSBC have decided to set aside £3.2 billion, £1 billion, £850 million, and £440 million for compensating victims of mis-sold PPI policies. The banks had to pay compensation worth £13 billion to victims of mis-selling of pension policies. The industry also had to pay £2.7 billion to victims of endowment mis-selling . FSA’s August 2010 payout estimate was pegged at £4.5 billion. There are fears that the actual sum may double and may exceed £9 billion.
James Daley, Money Editor of Which?, highlighted the peculiar problem faced by the bank customers. An individual who can choose to make purchases from another supermarket to enjoy better quality service does not have the same option when dealing with a high street bank. Bob Diamond, Barclays Chief Executive, accepted that banks often commit mistakes that cause difficulties for customers but said that the commitment of modern banks towards their customers cannot be questioned. Stuart Gulliver Chief Executive of HSBC, too sought to allay fears that the bank would discourage PPI claims simply because it has set aside an amount for missold PPI customers that was smaller than what analysts and customers expected.