September 24th, 2013

Published by: 1959thEbook

The 25 Billion UK PPI Claims Scandal

Everything You Need to Know
September 24th, 2013

an insurance premium onto their loan, they could double any profits. Let's look at the following example to illustrate this slyness. Let's assume that you borrowed just 10,000 from the bank and then repaid it across 3 years at 7%, a flat rate. You'd actually be paying 2% in interest for this "privilege," and you're going to be on the hook to repay a sum of 12,100 at 336. This works out to basically 11% in a calendar month. Still, the average price of the PPI policy would be 25% of the amount of your loan. This works out to 2500 in addition to interest, providing the bank with a total of around 3025 for this policy, which costs them nothing if they dont pay out.

Few scandals have rocked the UK as badly and as memorably as the UK PPI claims scandal. To understand this scandal, you must first have a working knowledge of its basics, which can be traced back to PPI. PPI is an acronym that stands for payment protection insurance. This is a kind of insurance that was initially connected to a loan, credit card, mortgage or other form of borrowing arrangement. Theoretically, it was meant to cover the insured person if, for whatever reason, he was not able to deliver the minimum, contractual payments. Payment protection insurance could cover individuals in cases ranging from sickness and accidents to unemployment. Theoretically, the PPI was not a bad product. Of course, sadly, there is always a gap between theory and reality. This form of insurance would just cover the borrowing that it was connected to, and not the policyholders' additional debts. To find out how such a theoretically good product went extremely bad, it is worthwhile to go back to the very beginning of this sordid saga. Here is everything you have to know about the 25 billion UK PPI claims scandal.

How PPI Policies Worked in the First Place

Essentially, a PPI policy is meant to cover any contractual payments in the event that you're not able to make payments due to illness, an accident or a lack of employment. Of course, this policy is only going to cover the payments on any debt that it's connected to, not any additional debts that you might also possess. Usually, the customer is subject to notifying his lender inside of a specific time period, after the relevant event, for the purpose of making a legitimate claim. He is then made to maintain any repayments for an additional 3 to 6 months until the policy will become active. In other words, he won't be getting even a penny until after the 3- to 6-month period. By this time, though, he'll likely have recovered from either his sickness or accident or been hired at another job and therefore able to make his payments. However, in the meantime, the customer will probably continue making his payments as usual; continue to make minimum payments as well as incur late payment fees; or end his contractual payments and thus incur late payment fees and default on the account in the third month. By this point, he would be mandated to repay the debt completely, plus additional charges, of course.

How It All Started

In essence, the banks make their money simply by lending money to their various customers at a higher interest rate than that at which they borrow it for. Unfortunately, some banks got greedier and greedier, so they came up with a devious insurance product that was intended not to pay out, but, rather, to be sold alongside credit cards, mortgages, loans and other kinds of borrowing. This is what came to be known as payment protection insurance or PPI. Other phrases existed that also stood for PPI. These were mortgage repayment protection, card protection insurance and loan repayment cover. What payment protection insurance so shrewdly did was offer the banks the chance to increase their profits when a customer wanted to borrow money. By way of incorporating

September 24th, 2013

Published by: 1959thEbook

As his policy does become active again, however, many lenders in this situation would start to cover any contractual payments for between 12 and 36 months. In essence, the policy then might not be valid for the loan's entire term. Thus, the borrower might well continue to incur late payment fees if the account stays in arrears.

January/February 2007: The FSA imposed fines on the main PPI providers. February 2007: The OFT came out with a formal referral about the PPI mis-selling. January 2008: The Competition Commission released its paper on the question of profitability of PPI. April 2008: The Competition Commission released additional papers revealing PPI problems. May 2008: Which? Magazine published a study examining how PPI was sold next to loans. It revealed that nearly 2 million people might have been sold a PPI policy they may not be allowed to use. July 2008: The FSA started to discover how firms managed PPI complaints. September 2008: Which? Magazine published a study looking at PPI sold next to a credit card. It revealed that more than a million people might've been chicaned into thinking they'd get credit approval if they took out PPI. January 2009: The Competition Commission advised that banks selling loans mustn't sell PPI simultaneously. February 2009: The FSA wrote another letter to the executives of banks, telling them to halt the sale of loans and singlepremium PPI together. May 2009: The FSA outlawed selling single-premium PPI. September 2009: The FSA issued a consultation paper on how to better handle PPI complaints. October 2010: The banks demanded judicial review of the new rules. October 2010: The Competition Commission acknowledged that PPI should not be sold at point of sale. January 2011: The British High Court starts the PPI judicial review. April 2011: The High Court's judge determined in favour of both the FOS and FSA. May 5, 2011: The Lloyd's Banking Group was the first to withdraw from any legal challenge. May 9, 2011: RBS, HSBC and Barclay's all decided to accept the High Court's ruling. February 2013: Lloyd's is fined 4.3 million for stalling on PPI payouts. June 2013: Lloyd's was determined to be rejecting legitimate PPI claims. September 2013: The FCA, new regulator, starts an investigation into the huge quantity of claims rejected by many banks.

The Mis-Selling of PPI

It was at the point of sale or some time thereafter when PPI was mis-sold to customers on a wide scale. Though the benefits of PPI would've been covered at such a time, suitability and/ or eligibility would not have been. There are numerous ways in which PPI was mis-sold. Here are just a few: A borrower could have been deceived into thinking that a loan would only receive approval if he took out PPI alongside it. In some cases, the borrower might've refused PPI, yet it was added to the loan just the same. Other times, the borrower would not even have been informed about the inclusion of PPI. A borrower could also not have been informed that the salesman would get a commission for the sale of PPI. Terms and conditions including exclusions were not explained to the customer. A borrower might've also been ineligible for the coverage because he was only employed part-time, unemployed, a student full-time, was of retirement age or already enduring a pre-existing medical condition and yet the lender would have sold PPI to the borrower just the same. A monthly premium policy was not offered to the purchaser, or he was misled to believe that PPI is compulsory. A borrower was not asked about his medical history. A borrower wasn't asked about any existing coverage that he might've had in place. A borrower could've been a public sector employee who was entitled to complete sick pay from his boss.

The Scandal Timeline

1998: Which? Magazine initially raised questions about PPI. January 2005: The UK's Financial Services Authority assumed both the regulation and sale of general insurance products, promising that it would make a PPI review its priority. September 2005: The Citizens' Advice Bureau came out with a report exposing the problems of the PPI marketplace and made a formal complaint. November 2005: The FSA came out with its first report about PPI, identifying bad sales habits and an absence of compliance control. October 2006: The FSA released a report with additional evidence of shabby compliance and relentless PPI mis-selling. 24 companies were subjected to enforcement proceedings for this abuse. October 2006: The Office of Fair Trading came out with a report that concluded it would refer the PPI mis-selling crisis to the Competition Commission.

18 Billion PPI Claims Provision

The banks have surrendered to pressure after the BBA judicial review into the mis-selling of PPI. As such, they've agreed to repay the people who were mis-sold PPI. o Barclays Plc - 4 billion
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September 24th, 2013

Published by: 1959thEbook

o Lloyds Banking Group - 6.7 billion o Royal Bank of Scotland - 2.2 billion o HSBC - 1.6 billion o Co-operative Bank - 100 million o Santander - 500 million o Clydesdale Bank - 100 million However, a lot of analysts still opine that the real cost could be much higher...somewhere closer to 25 billion. This could be the biggest compensation scheme ever in the UK.