Another mis-selling scandal rocks UK banks’ reputation
By Patrick Jenkins
Cleaned-up banking market could come with an unwelcome quid pro quo for customers
Another week, another mis-selling scandal, another example of banks behaving like brutal muggers until they are frogmarched back to confront their victims – and give them a bit of first aid.
This time, 13 banks and credit card companies are going to have to fund a £1.3bn compensation plan for customers who were sold unnecessary credit card theft insurance.
The settlement, imposed by the Financial Conduct Authority, might be less costly than other recent mis-selling scandals – PPI (£15bn and counting); interest rate swaps (up to £2bn). But in terms of blatant mistreatment of customers, it is more egregious than anything that has gone before.
This is an insurance product that duplicated a facility automatically provided by a credit card company: if a thief takes off with your Barclaycard and enjoys a £5,000 spending spree, it is Barclays that will foot the bill, not you – making any kind of personal insurance a nonsense.
There are, all the same, a couple of wrinkles to bear in mind.
First, the mis-selling took place in this case not via the banks themselves but through a specialist warranty company, CPP. The banks were the ones that referred their customers to this go-between and are, quite rightly, being punished for it.
It is surprising, though, that CPP itself has got off so lightly. Yes, it was fined £10.5m last year. But this is a company that, according to regulators, made £845m of revenue and £79m of net profit from the business over the six years in question, 2005-11.
On that basis, it is hard to justify the fact that CPP’s share of the £1.3bn compensation pot is projected to be just £17m, a fraction of the money it made.
It seems the FCA pulled its punches for fear of putting a struggling company out of business. Instead, it should have recouped at least the £79m plus interest, even if that meant wiping out shareholders and debtholders (which, incidentally, include Barclays, Royal Bank of Scotland and Santander).
It should also have added another two banks to the tally of 13 on its hit list – JPMorgan and UBS, the advisers that floated CPP in 2010. The float, at the height of the mis-selling period, valued CPP at nearly £400m, and generated a £120m windfall for the company’s founder and majority owner, compared with less than a 10th of that figure today.
If it has been soft on some parties in the latest scandal, the FCA shows little sign of letting up on the mainstream banks. Lenders are braced for more mis-selling fines and compensation claims in several areas.
They might have breathed a sigh of relief last month when Martin Wheatley, the FCA chief, said there was no evidence of widespread mis-selling of interest-only mortgages, 2.6m of which are outstanding. Some borrowers had claimed they were not aware they needed to repay the loan at the end of the term, in addition to annual interest.
If banks are genuine about having changed their ways and are to have any chance of winning back public trust, they must . . . ensure their sales practices are beyond reproach
But other products – high-cost packaged and premium current accounts, as well as long-term investments, such as endowments and pensions that carry big fees – could yet turn into disasters for the banks.
Something clearly needs to change. A dynamic of perpetual scandal – in which banks milk their customers, are exposed for mis-selling and pay out billions of pounds in compensation – is no way to run a business.
For the new breed of directors running the likes of RBS, Barclays, Lloyds and HSBC, the problems exposed over the past couple of years can be categorised as “sins of the past” – the PPI affair took place largely before 2009; even the latest credit card insurance affair did not extend beyond 2011.
But if banks are genuine about having changed their ways and are to have any chance of winning back public trust, they must get ahead of the game and ensure their sales practices are beyond reproach.
Some insist that process is under way. Lloyds, for example, has returned to the PPI market, with a relaunched “essential earnings cover” product, that it insists is sold only to people who could benefit from it.
A cleaned-up banking market could come with an unwelcome quid pro quo for customers. The aggressive selling of inappropriate products was lucrative business for the banks. Without it, they may charge more for their basic services. But as long as products are transparent and are not mis-sold, consumers should welcome the new approach. It’s surely better than getting beaten up, no matter how good the bandage and aftercare.
Business the first to receive compensation for mis-sold interest rate swaps - a year after payouts were ordered
By HELEN LOVELESS
PUBLISHED: 11:15, 25 August 2013 | UPDATED: 11:16, 25 August 2013
The first compensation payment for a firm mis-sold an interest rate ‘swap’ has been made - more than a year after the regulator ordered the banks to pay out.
Swaps are insurance policies designed to protect against interest rate movements and were widely sold to businesses taking out loans between 2001 and 2008. Regulators last year ruled that the banks had mis-sold about £2billion of swaps, with 40,000 firms affected.
Yet until a few days ago not a single business affected had received actual compensation though some offers of redress had been issued.
The delays in settling with firms have been widely criticised by MPs, campaign groups and those affected. Business Secretary Vince Cable last month urged the Financial Conduct Authority to put pressure on the banks to settle claims more quickly.
Bullybanks, the campaign group made up of more than 1,000 businesses mis-sold swaps, estimate that more than 400,000 jobs have been lost as a result of the mis-selling scandal, with the Treasury losing out on £1.7 billion a year in revenue.
Last month Jeremy Roe, chairman of Bullybanks, said: ‘Instead of coming out with a simple assessment of mis-selling, the vetting procedures are too complex and are causing long delays.’
The main reason for the delay is believed to be the fact that compensation is made up of two parts - the actual amount paid for the swap and the losses incurred as a result of taking out the product, known as consequential losses.
Assessing what a firm paid for a swap is straightforward, but assessing consequential losses is harder. But the banks have been working on the basis that both factors must be assessed as a single claim before any payment can be paid.
However, high street bank Santander has now bucked the trend by repaying one firm the direct costs of a swap mis-sold to them by Alliance & Leicester, which Santander acquired in 2008. The business will now put in a claim for consequential losses separately.
Santander is believed to have acted after former home secretary Jack Straw intervened.
A spokeswoman for Santander said: ‘While we won’t comment on specific cases we can confirm that we have commenced our remediation programme and where appropriate made suitable offers of redress to a number of customers. This is ongoing and we intend to complete this as quickly as possible.’
The mis-selling scandal has even affected high profile business figures. Earlier this month it was reported that Amstrad tycoon Lord Sugar had complained to Lloyds Banking group after hedging products worth £10 million were sold against loans taken out on his property empire.
When will it ever end? Never, of course...