Arnie is back on the TV and I don’t mean the adverts for the next instalment in the Terminator story; he’s here to remind us that the long running saga of PPI is coming to an end.
What is PPI?
Payment protection insurance, or PPI, is an insurance product that is sold by banks alongside loans. The policies are designed to ensure that loan repayments will continue to be met in the event that the borrower is unable to cover them, for example because of redundancy. While the principle is valid, historically, the product has been mis-sold and in many cases customers ended up paying for the insurance without realising they had taken it out in the first place.
In stepped the regulator and in 2011, so began an unprecedented public compensation programme.
Impact on the banks
The net result of this compensation programme was huge redress payments made by the banks to their customers. According to the FCA’s website, payments so far (to May 2019) have totalled £35.7bn.
Source: FCA, May 2019 https://www.fca.org.uk/data/monthly-ppi-refunds-and-compensation
When we add in the costs that the banks themselves have incurred sorting out the mess, the number gets bigger still. According to the latest financial results (H1 2019), the six largest banks in the UK (HSBC, Lloyds, Barclays, RBS, Santander and CYBG – the holding company that owns Clydesdale Bank, Yorkshire Bank, the mobile banking platform, B and Virgin Money) have between them made cumulative provisions for almost £43.4bn. Lloyds alone has provided a little over £20bn. This is, however, not free money, although it may appear that way to the recipients. It came directly from the banks’ capital, which meant they were able to lend less to their customers, and in some cases they had to pay lower dividends to their shareholders, which of course include pension funds and charities. To put this number into context, the annual post-tax profits of this group, including the global profits from HSBC (most of which are made outside the UK) amount to about £22bn.
It is, of course, possible that the final advertising campaign causes a spike upwards in claims towards the end of the summer, but at least we know an end is coming.
Beyond the financial impact, the reputational damage to a sector still reeling from the financial crisis is untold. Despite significant regulatory and culture change, people do not trust banks. In fact, a survey by Positive Money revealed that 10 years on from the financial crisis, two-thirds of people still don’t trust
UK banks to act in the best interests of wider society.¹
Now we are in the home straight. Thursday 29 August 2019 is the deadline beyond which further claims cannot be made. The drag, that has cost two years’ worth of the entire sector’s profit, will be gone.
Of course, it would be rash to claim that there will not be any more fines and penalties to pay for other earlier misdemeanours, but when compared with this beast, the likelihood is that any future payments will be far smaller.
To me, it is clear that banks are far better businesses than they were when the PPI scandal first erupted. Balance sheets have shrunk radically and there is a renewed focus on core deposit taking and lending. As a result, banks have, in many cases, become much more like utility businesses, providing necessary but ultimately unexciting services, with much steadier revenues.
As a long-suffering investor in UK banks, I look forward to a new dawn for the sector and will gladly say “hasta la vista, baby” to the painful PPI-era.
¹ Positive Money, August 2018: https://positivemoney.org/2018/08/british-public-dont-trust-banks/