Six years ago, bus driver Michael Hampton decided to rent a one-bedroomed flat. There was only one problem: he needed £2,500 for a three-month deposit, and as much again to buy furniture.
So he turned to an Abbey National branch in Hertfordshire, where he’d banked for years. The loan they proposed would have to be paid back over five years, which was fine.
But Mr Hampton, 50, was also urged to take out payment protection insurance, which would cover his payments if he fell ill. This cost a hefty £43-a-month.
And there was a catch: the saleswoman at Abbey National, he said, ‘insisted that my loan application would be looked on more favourably if I took out the insurance’. Feeling he had no choice, he agreed.
It wasn’t until Mr Hampton had been paying the premium — known as PPI — for nearly five years that he learned from a TV programme that serious questions were being raised about this type of insurance. In fact, his was a classic case: his length of service as a bus driver entitled him to 26 weeks’ sick pay, so he hadn’t needed PPI at all.
Cross that he’d been pressured into buying worthless insurance, Mr Hampton printed off complaint forms from the internet last summer, sent them to his bank — and received a cheque for £2,628.61 within a week. ‘It makes me feel angry to think that my own bank could rip me off like that. It’s made me a more wary customer,’ he says.
Indeed, PPI has proved to be an expensive business not only for customers like Mr Hampton but also for the High Street banks.
And it has certainly put paid to the general feeling that there was only one set of bad guys: the risk- taking investment banks.
The roots of the scandal date back to the early 1990s, when High Street bankers came under pressure to produce more profits. Very quickly, they worked out that they could make large sums from financial products targeted at their millions of customers.
The Abbey National were among the banks that missold PPI to its customers
Everyone piled in. It got to the point, says leading KPMG accountant Bill Michael, where banks were treating their loyal customers like geese — ‘captive geese that can be force-fed, or sold more product to — whether appropriate or not’.
The goal, preached from the top, was to load up the customer with as many products as possible. And to motivate staff, they were offered bonuses according to how many they sold.
PPI proved a veritable goldmine. For the customers, it added 20–50 per cent to the cost of a loan. And the bank kept most of that — paying out only about 15 per cent of their income from PPI to claimants who’d fallen ill. Staff were soon provided with word-for-word scripts of high- pressure sales pitches. Many even blackmailed customers by claiming they couldn’t approve a loan or credit-card application unless insurance was attached.
Consequently, around 34 million PPI policies were sold between 2001 and 2012, generating sales of up to £5 billion a year.
There were occasional rumblings of discontent; and in 2005, Citizens Advice filed a complaint about the mis-selling of PPI. But it wasn’t until four years later that the Competition Commission finally recommended a ban on most of these products.
That’s when the first great wave of PPI claims started arriving at the banks — who initially resisted.
Finally, Lloyds was the first to cave in: it announced it was setting aside £3.2 billion to pay legitimate claims for compensation for mis-selling.
It was a retreat on an epic scale. Three other major High Street banks soon followed its lead: Barclays set aside £1 billion, HSBC £269 million and RBS just over £1 billion.
No one, however, had fully recognised the scale of the compensation that would be required. (Lloyds, for instance, has had to more than double the amount in its compensation chest to £6.7 billion.)
By early this year, the estimate for legitimate claims had risen to an astounding £20 billion — a figure that’s still climbing. This means that PPI is now officially Britain’s worst consumer scandal of all time. Ironically, it has spawned a vast new industry. Part of this is within the banks themselves: more than 20,000 new jobs — 7,000 at Lloyds alone — have been created just to deal with the claims.
Lloyds was the first to cave in: it announced it was setting aside £3.2 billion to pay legitimate claims for compensation for mis-selling PPI
And no wonder. By 2012, 7,000 complaints were being lodged a day. There were 4.3 million in 2013 alone.
During this period, banks were sending out up to 10,000 compensation cheques a day, with an average payment of £2,750. Inevitably, another industry was born. Almost overnight, claims management companies (known as CMCs), sprang up to target potential clients via advertising campaigns and assault them with an avalanche of texts and telephone calls.
Soon, there were around 800 CMCs, spending £24 million a year on advertising alone. Incredibly, around three-quarters of all adults in the UK have now received at least one unsolicited message from a CMC.
The claims companies, meanwhile, grew ever fatter as they took an average of a quarter of each compensation payment. By March last year, it’s estimated that they’d creamed off up to £5 billion — much of it from consumers who didn’t realise they could easily lodge a free claim themselves.
Before long, banks began to complain vociferously that they were being swamped by bogus claims. Lloyds chief executive Antonio Horta-Osorio says even he has received calls suggesting he’s eligible to claim PPI compensation from his own bank.
And one in four of the claims that come into Lloyds, he says, are from people who’ve never had a PPI policy with the bank at all.
The banks are exasperated by the CMCs, arguing that they simply harvest as many customers as they can, then send details of their claims to every single High Street bank. In their defence, the CMCs claim that people may have forgotten which bank they’d dealt with originally.
Even now, more claims continue to flood in, and the whole PPI debacle remains a terrible mess.
There has, however, been one positive unintended consequence: people who receive a PPI ‘windfall’ tend to spend it. Already, for instance, there’s a strong correlation between the pattern of PPI payouts and sales of new cars.
Best of all, if the final figure paid to claimants ends up reaching £20 billion, it will boost growth in the UK by more than 0.2 per cent. This may sound very little — but it would actually beat the impact on the economy of the 2012 London Olympics.
However, the High Street banks didn’t just fleece ordinary customers. Blinded by their lust for profit, they also targeted Britain’s 4.5 million small and medium-sized businesses.
This was cynical in the extreme. Most small businesses rely almost entirely on High Street banks when they need an injection of capital or a loan for new equipment or premises.
My wife’s family, for instance, still remembers the crucial loan of £10,000 made by Lloyds Bank to her grandfather, Maurice Lermon.
It was this money that enabled the immigrant shopkeeper to start expanding — and eventually build the Macowards chain of department stores up and down the land.
That was then. From 2001, most loans to small businesses came with rather a large catch. This was in the form of a complicated insurance deal — called an interest-rate hedging product (IRHP) — which few people could understand.
This was a fiendish product. On the surface it looked all right: if interest rates rose, the borrower wouldn’t have to increase his payments back to the bank.
So gung-ho were the banks that many told customers they wouldn’t get a loan unless they agreed to have an IRHP — which would cost them quite a bit extra a month.
Unfortunately, however, most bank staff failed to explain what would happen if interest rates fell — which is what happened in 2008 when the financial crisis took hold. At that point, far from remaining static, repayments to the bank actually went up.
At a stroke, 40,000 small businesses — from fish-and-chip shops to hotels and pubs — found themselves under terrible financial pressure.
One of these was Colne Valley Golf Club in Essex. The club had been struggling when Jennifer Smith bought it with her son and brother in 2001, but she’d improved it and the membership had grown.
In 2007, she decided to build a small hotel beside the clubhouse, so she went to her local Barclays — where she’d banked for more than ten years.
They duly offered her a £1.3 million loan. But they also insisted that she take out an IRHP — indeed, she was told there’d be no loan if she didn’t agree to have it.
Nobody mentioned that she’d have to pay more if interest rates plummeted. Yet by January, 2008, she was suddenly asked for an extra £4,000 a month.
This happened to be her entire monthly profit from the golf club. Horrified, she asked Barclays to get her out of the IRHP.
No deal, they said — she’d have to keep on paying, unless she was willing to break the contract for an extra £290,000.
There was nothing she could do except try to find ways to save money. So, reluctantly, Jennifer let two of her staff go and stopped using several casual workers. Everyone else had their hours pruned. And, naturally, plans for the hotel were laid on ice.
As financial pressure mounted, the bank put the business under special measures in January 2009 — which meant a firm of accountants was now calling the shots. Looking for ways to cut costs, they ordered Jennifer to reduce the amount of fertiliser she used on the greens.
‘We did this and the greens became diseased — and we had to go back to what we had done before,’ she says. ‘They told us to put up prices — but people stayed away, so we had to put them down again.’
For the first time in her business career, her cheques were bouncing. ‘I really thought I would go under,’ she recalls. ‘I thought I would have a nervous breakdown.’
Somehow, the business limped on — no thanks to the accountants or the bank. Meanwhile, complaints about the IRHPs had reached a crescendo.
But it took until June 2012 for Barclays, HSBC, Lloyds and RBS to finally reach an agreement about their poisonous product with the Financial Services Authority (FSA).
Finally admitting that many firms were due compensation, they put together a war-chest of £3 billion. Thus Jennifer’s became one of the tens of thousands of small businesses that lodged a compensation claim against her bank. But this was hardly cause for rejoicing.
The last time I contacted her, the case still hadn’t been settled. In the meantime, she says: ‘The business has lost its momentum, and it will be hard to get that back.
‘We are a close family, but there have been tensions between the three of us and our wider families over this.’
The very painful lesson she’s learned is: ‘Never sign something you don’t understand.’
Last year, after a two-month review, the FSA declared that 90 per cent of IRHPs appeared to have been ‘mis-sold’.
And they decreed that any firm with less than £6.5 million in annual sales, fewer than 50 staff, or assets worth less than £3.3 million — would now qualify for automatic redress. Other firms would have their cases reviewed by an independent monitor.
So far, though, the actual paying-out process has been extremely slow. Between July 2012 and autumn 2013, just 32 firms received £2 million in compensation.
The banks have been ordered to speed up.
But the tragedy is that even a fat compensation cheque may well be too late for some. Thanks to the greed of the High Street banks, some small businesses have already gone to the wall.
DAILYMAIL.CO.UK
No comments:
Post a Comment