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The scandal of PPI: where were the regulators?

The BanksEven as we have got used to the iniquity of the banks, the latest revelations still take the breath away. The scale of the payment protection insurance (PPI) mis-selling scandal is truly gigantic. The aim behind PPI was to cover borrowers’ loan repayments if they fell ill or lost their job, but it developed into a monster which sold to borrowers who often didn’t want or need it, and certainly had little or no idea of the scale of commitment they were taking on.

PPI could add 20% to a personal loan, and the profit margin on selling PPI made by some banks actually reached the staggering level of 90%. By offering ‘free insurance’ (actually a free month’s trial as a hook, after which it was for the customers to cancel the policy, which few did), the banks sold 20 million PPI policies by 2006, and between 2001-10 amassed colossal sales of £34bn, equivalent to a quarter of the entire UK GDP.

Those selling knew they were working in a corrupt industry, making vast profits by exploiting the lack of consumer numeracy. It became a cancer riding the crest of the consumer credit boom. The premium required to pay claims on PPI, which were tiny compared with other insurance products, was only 3% of the loan, but lenders were charging the equivalent of 20%. At the height of the market in the mid-2000s more than half of banks’ retail profits came from PPI alone, which explains why the banks, which understood all too well the scam they were perpetrating on their customers, wouldn’t put a stop to it.

Complaints surged after 2006 and reached 160,000 a year by 2011. PPI compensation paid out so far by the banks has already grown to £6.5bn, but is currently continuing at £600-700m a month, and it is estimated the final cost could be £15bn. But that still leaves several vital questions. Why has there not been a wholesale sacking of PPI managers and salesmen who knew the scheme was a colossal trick, but still carried on doing it?

Where were the regulators over those 9 years – comatose over LIBOR and asleep over PPI? Isn’t neither the FSA nor the Bank of England on their past record up to the job, and do we not need the vigilance and intrusiveness of a US-style Securities and Exchange Commission? And above all, can the banks who did these things ever be trusted again? They need to be broken up into smaller specialist banks, no longer too big to fail, but with a new role and structure designed to serve Britain’s interests, not their own self-seeking greed.

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