© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
August 23, 2013 4:28 pm
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.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in