Financial Mis-selling: A Glimpse
Ever since money was invented as a medium of trade, frauds and scams have become commonplace. Over the years, financial crime has become smarter but also more dangerous.
Mis-selling is quite identical to stealing, except that it is a lot more sophisticated. In simpler terms, financial mis-selling is the practice of selling financial products to customers for whom it may not be of much value.
It deals with all sorts of manipulative techniques which are used to mask off selective aspects and selling the product without letting the buyer know the complete picture. Financial mis-selling has majorly dug into areas such as investment, pension and insurance, and other vulnerable practices.
Payment Protection Insurance (PPI): What does it mean?
Payment Protection Insurance (PPI) is an insurance policy that enables the customer to be financially covered by the provider if they are unable to earn their income due to unforeseen circumstances.
The lender is obliged to cover the customers on the event of their sudden death, severe mental or physical illness, serious accident, unemployment or any other circumstance that disables the buyer to earn their regular income.
PPI is also commonly known as credit insurance, loan repayment insurance or credit repayment insurance.
The policy has received these names due to its regular pairing with loans and credit advances. The policy is often sold to the customer by their concerned commercial banks and/or card companies while borrowing a loan or credit.
The policy usually covers payments for a specific period of time (mostly 12 months). In order to pay off loans and mortgages, the entire monthly payment is sanctioned, whereas the minimum monthly amount is paid in the case of credit cards.
The customer would be given the financial cover for that period, following which they may have to resort to alternative means.
However, there are certain policies that repay the entire debt amount in case the buyer is not able to return to work.
Is PPI The Same As Income Protection Insurance?
There have been several cases where PPI has been confused with Income Protection Insurance. Though both the policies are concerned with paying the buyer who is unable to work, there is a thin line between the two.
It is important to note that while PPI deals with covering a particular debt or any other payouts taken care of by the lender, Income Protection Insurance gives the buyer a tax-free portion of their income if they are not able to work because of an illness or injury.
Also, PPI generally pays out for the period of 12 months, while Income Protection Insurance can be issued for the customer’s entire life.
What Are PPI Exclusions?
PPI cannot be bought by anyone who is willing to buy the policy. There are certain categories of people who are not entitled to avail the benefits of the policy.
These categories are commonly known as PPI exclusions. Though all these exclusions may not hold true for every policy sold (always read the policy documents carefully), these are some of the common PPI exclusions:
- Students and People Attending Higher Education – If an individual is a student or is attending higher education, their employment cannot be classified as a full-time employment. There have been several students who work along with their studies, but PPI is not sold to customers engaged in a part-time employment.
- Self-employed – PPI is also not suitable for an individual of they are self-employed or have a business of their own. So, PPI can only be issued to people working for a separate organisation on a full-time basis.
- Part-time Workers – Though there is no clear distinction between part-time and full-time workers, full time workers are generally working at least for 35 hours in a week. Anything lesser than this or on a convenience basis can be considered as a part-time job. Part-time workers will not be able to reap the benefits of the PPI policy or make a claim for for it.
- Contract Workers - PPI is also not suitable for people working on a contract basis. As these individuals work only when they are called for and are not regular in their work hours, they are also classified as part-time workers.
- Existing Medical Conditions – The lenders would not compensate for an illness you already had at the time of purchasing the PPI policy. PPI is only meant for covering the customers if they are not able to work due to sudden adverse medical conditions. If a borrower makes a claim for not being able to work due to an existing illness, the claim is very likely to be rejected by the authorities.
- Mental Health Problems – If a customer is suffering from a mental illness or has a record of past mental illnesses, they cannot be sold a PPI policy.
- Joint Borrowers – If there are two working individuals applying jointly for a loan, it will be dependent on two working adults and the repayments would be taken care of accordingly. However, a PPI policy cannot be issued to both the applicants individually. It is usually only issued to the first named applicant for the concerned loan or credit.
- Age Limit – Though there is no specific age after which the buyer cannot be covered by the policy, the policy can only be sold to those who are below a certain age. Being different for every buyer, they can be covered by the policy only till they reach their specified age.
PPI: How Did The Mis-selling Start?
In 1960s when PPI policy had just been introduced in the market, it was considered to be a great insurance and investment option. Due to its high profitability the banking industry gradually started selling this policy.
As they sold PPI to the customers, they started realising that it is a high-profit financial product. The mere commission that they were getting as lenders was huge. They started viewing PPI as a financial product which could reap huge profits for them and naturally they were tempted to make the most of it.
This greed made these financial institutions mis-sell PPI. As they were well aware of the fact that the policy would help them make more money, they started thinking of ways to manipulate their customers to buy a PPI policy.
This was the conception of the infamous PPI scandal.
The banks and card companies resorted to several unethical ways of selling the policy. Some of them are mentioned as follows:
- The lenders sold the policy along with a loan or credit borrowed by the customers. Here, the buyer is completely unaware about their purchase of the policy.
- The lenders were aware about the PPI policy being sold to them, but certain clauses of the policy were deliberately kept hidden. The most common hidden clauses included the payment of commission.
- The customers were explained the policy, but in a way that normal aspects were highlighted and the other were totally suppressed. This practise was used in order to falsely glorify the picture of the policy to the people who don’t really need it.
The banks continued selling and mis-selling PPI policies to the people of the UK. The innocent buyers had no clue that they were making payments for a policy whose benefits they could not gain any advantage from.
On the other hand, the ignorant buyers never really cared about the important clauses as far as their purpose of being covered was concerned. This is exactly what the scammers took advantage of.
They targeted customers who they believed were either innocent or ignorant and mis-sold the policy to them. In this way, they were able to earn a lot of money in the guise of commission for years without the customers even knowing where their money was going.
This practise continued for years and was finally exposed as an act of fraud.
How The PPI Scandal Unfolded
It is believed that financial institutions have been mis-selling the PPI policy since 1990s. For quite some time, PPI was considered to be one of the most beneficial insurance policies to invest money.
However, greed took over their intentions and lenders started mis-selling the policy on a large scale since they realised that it could earn them handsome profits. The scam carried on for several years until it was exposed in the 2000s. Until then, the commercial banks and card companies kept misleading consumers into buying the policy through unethical ways.
In the mid-2000s, certain customers realised that there was a particular amount being debited from their bank accounts. The word slowly got around and soon media was investigating into the matter.
Be it the press or the victims of this mis-selling scandal, everybody was busy looking for the culprits. After checking their loan agreements and their documents regarding borrowed credit, they were convinced that it was the commercial banks that sold them the policy without their knowledge.
However, the affected individuals had no idea about what they should do next. It was devastating for them to know that a certain amount was being deducted from their personal accounts and they had no information regarding why.
In 2004, the Guardian made a revelation stating that several banks were returning hardly 15% of the customers’ PPI income to the claimants. Therefore, this made PPI a much more lucrative option as compared to other insurances such as home or car loans.
Finally, in the year of 2005, Citizens Advice exerted greater pressure on lenders by launching an investigation into the matter. This investigation labelled PPI as a ‘protection racket.’ All the banks and card companies were now fighting a lost battle.
The Charge Sheet Against PPI
After a detailed investigation into the matter of PPI mis-selling, a fourfold charge sheet was made against the policy, which made the following claims:
- PPI was regarded as an expensive policy, with premiums adding 20% to the value of the loan sanctioned. There have also been cases where the premium has been as huge as 50%.
- PPI was now officially a ‘mis-sold’ policy, as it was either sold without the knowledge of the customers, as an ‘essential’ along with a loan or sold to people who are not entitled to buy the policy (PPI exclusions).
- PPI was also perceived as an inefficient policy due to the lengthy delays and complicated procedures of making rightful claims.
PPI: The Role Of Financial Services Authority (FSA)
Soon after the scandal was exposed, it started getting a lot of media attention. There were new claimants everyday who realised that they had been wrongly sold the policy.
As the number of complaints started increasing exponentially and the compensation amount started piling up, the FSA officially made a declaration stating that the PPI issues were of utmost important in 2005.
This was the same year when the FSA took over the charge of regulating the general insurance agency. At the end of the year, it also wrote to the heads of all the banks of Britain regarding the issue of PPI mis-selling.
In 2006, the FSA started imposing fines on the offenders that were found guilty of mis-selling the policy. This started with a fine of £56,000 which was imposed on the Regency Mortgage Corporation. The firm was reportedly accused of selling PPI to the ‘right-to-buy’ mortgage customers who would not have been able to claim their compensation. The company was also accused of selling the policy to customers already having insurance.
There were many such cases that followed. Liverpool Victoria Banking Services was fined £860,000 in 2008 for secretly adding the policy into the deal of customers who had only asked for a simple loan.
Alliance and Leicester was fined around £7 million. FSA came to the conclusion that their staff was being told to put pressure on the customers when they were questioned about the inclusion of PPI in their quotation.
Also, the FSA banned the most disastrous variation of this insurance in 2009 – Single Premium. This policy was often sold to mortgage-buyers and was added to their total loan in the beginning itself. In 2011, the FSA came up with a new set of rules for PPI sales, which made the issuing of policy clearer. The regulations stated that:
- The customers must be given a personalised quote that deals with all the details regarding costs and covers
- PPI could not be issued to the customers at least for seven days after the loan was sanctioned
- It was mandatory for the lenders to inform the customers and notify them in writing about the fact that PPI is an optional policy
- PPI sellers had to give an account of the number of customers that have been satisfied with their services and were successful in claiming their respective policies.
All these clauses made it safer for the customers to get a loan or credit without having the fear of PPI being unknowingly sold to them.
PPI: The Role of Ombudsman
As the number of PPI claims and compensations increased, every other bank and card company was flooded with new complaints pouring in every single day.
Due to this mess, the lenders started ignoring the complaints. If a mis-sold buyer needs to apply for a compensation, all they need to do is call their lender, give them the policy details and get their complaint confirmed.
However, there were several lenders who refused to cooperate with their customers. Here, the FOS came into the picture.
When many complaints were ignored by the lenders, mis-sold buyers started approaching the FOS. It was their last resort to settle their claims. The duty of the Ombudsman is to settle the dispute/misunderstanding between the customers and their lenders, and make sure that every customer is dealt with justice.
If a customer has been neglected or denied their compensation by the lenders, they can fill an online form and submit it to the Ombudsman.
The Ombudsman would then ask for the related documents and would also get in touch with the concerned lender in order to get a clearer picture of the situation. After detailed analysis of the case, either the lender would be penalised and asked to pay the compensation, or if the lender wins, the compensation would be deemed as invalid.
Over the past few years, the number of complaints coming to the Ombudsman has only been rising. This situation can be compared to an overflowing tank of water. In spite of the financial institutions working on hundreds of cases every week, there is still an equal number of cases that need to be resolved.
For years at a stretch, the FOS has made declarations, claiming that out of all the cases coming to them in a year, more than half the cases are regarding PPI.
In 2014, the FOS reported to have been receiving around 1,000 new PPI complaints every single day. The situation has now gone so ugly that the regulatory body is thinking of increasing the number of employees for making sure that the PPI cases are resolved as soon as possible.
Can I Get A PPI Refund If I Owe The Bank Money?
A customer generally purchases a PPI policy from a bank they already have an account with. The policy is generally attached to a loan or a credit card sanctioned by the bank.
However, one question has always popped up in the minds of mis-sold customers. They always wonder if they would still receive their PPI refund if they owe a debt to their banks. You can definitely claim compensation from a bank you owe money to, but whether you will be paid the amount or not depends on the nature of your debt.
A customer can always make a claim for compensation from a bank to which they are actively making repayments. However, if there is a situation where the claim is upheld before the money being sent, the bank would check the customer’s account and its status.
The refund money would be paid to them separately only if none of their bank accounts are in arrears. If money is overdue in any of their accounts, the compensation would go into paying off the concerned debt before it is paid to them.
A customer should always make this check before claiming the refund money separately from their banks.
However, if all the accounts are clear, customers can get the refund in spite of them owing money to the bank. The payment is generally made in the form of a cheque.
This money can then be paid into the customer’s account with the bank or into any account of their choice. The customer is free to decide what to do with their compensation amount. This refund is considered as a separate sum altogether, which may or may not be used to repay the debts, depending on the customer’s will.
Can You Receive PPI Refund Against An Account In Arrears?
The issue of mis-sold PPI is dealt separately from other issues faced by the account holder. The fact that you are struggling to pay debts may have nothing to do with you being mis-sold an insurance policy. You can make a claim for compensation to your bank even if you have an account in arrears. However, you may not directly receive the money.
This is due to the Set Off rule followed by the banks. According to this rule, if your account is in arrears, the bank can use any income of yours to settle the debt and clear all the dues before you get the final cash-in-hand. In compliance to this rule, the bank would use your PPI refund amount to clear your account in arrears.
You should also note that the Set Off rule applies to all the accounts you hold in your bank, for example, the refund you are getting can be used to settle any account that is in arrears (i.e. money that is owed and should have been paid earlier). It need not be the same account you are claiming your compensation against.
There have hardly been any cases where a customer has refused the bank to clear the arrears and to hand over the compensation separately. The Set Off rule has always helped the customers to get debt-free sooner, as the amount received would have gone in paying off the debts anyway.
Can You Keep Your PPI Compensation, Being In A Debt Management Plan (DMP)?
A Debt Management Plan (DMP) is a formal agreement between a debtor and a creditor which deals with the terms and conditions of repayment. It may deal with the matter of easy instalments or the period of time within which a debt has to be paid off.
A DMP generally involves the creditor in accepting reduced payments from the debtor. If you are in a DMP, it is safe to assume that your creditors have agreed to accept reduced payments for your debt.
If you are in a DMP, you can still keep your PPI refund amount with you, unless your account is in arrears. There have been cases where in spite of a customer being in a DMP, their accounts were still running in arrears.
In such cases, any amount you receive would go in settling off your debts before you receive your compensation. If the arrears are greater than your compensation amount, you may not receive any money at all. You being in a DMP cannot help this situation if your bank debts are overdue.
It has often been argued by customers that such a practise is unfair. They have said that they may have other important debts to settle which can be taken care of by the compensation they receive.
However, the bank cannot be penalised for agreeing to have reduced payments with you. A DMP generally lasts for a long time, which may get troublesome for a customer after a point of time. In fact, claiming PPI refund against a debt you owe under DMP can help you reduce the plan duration significantly.
However, if you are no more in a DMP and you have settled your debt before claiming PPI refund, you are entitled to the entire amount and are free to use it wherever you wish. However, if you have settled your plan early with a lump sum payment, the bank may still argue before giving you the money, as the remainder of your debt would still exist.
The banks would ask you to clear your dues according to their Set Off rule. This still doesn’t mean that you won’t get the money.
You can fight this in your favour, provided you have an acceptance of your statement offer in written, clearly stating that the debt has been paid off in a lump sum and the remainder amount is to be written-off. This would make you absolutely debt-free, thus invalidating the Set Off rule.
In such a situation, you will get your refund in full at your disposal.
Will You Receive PPI Compensation If You Are Statute-Barred?
If you borrow funds from a creditor and fail to repay them for a certain (generally long) period of time, you can no longer be forced by the creditor to make the repayment. After crossing this time duration, you are called Statute-Barred.
Generally, a debtor is considered to be Statute-Barred if they fail to repay the creditors for more than six years. Once this margin is crossed, no creditor can legally force a debtor to pay them their dues.
It is common to believe that if you are Statute-Barred, all of the PPI compensation you receive will be awarded to you. However, that is not the case. Even if you are Statute-Barred, the Set Off rule would still apply to your refund and the amount would be used in paying off the debt.
This is because the debt is never written off.
It still exists, and the creditor can therefore use any funds that you owe in order to settle their debts, PPI refund being one of them. You should always keep in mind that your debts are never written off even after you being Statute-Barred.
It has always been an unwise decision by the customers to make claims against a Statute-Barred debt. The claim may also be considered as an acknowledgement of the debt, making it enforceable again. So, if you’re expecting to receive your compensation amount in full after being Statute-Barred, that would definitely not happen.
PPI Mis-selling Scandal: Major Offenders
The majority of the high-street banks and card companies have been offenders of PPI. After the scandal was unfolded and as the victims started realising that they were mis-sold, almost every major banking company was named and shamed for playing this financially notorious scam.
We’ll discuss below two of the major offenders of the PPI scandal, which are also amongst the most trusted banks in the country. That’s Barclays and Lloyds.
What Was The Role Of Barclays In Mis-selling PPI?
Barclays has been one of the topmost offenders of the infamous PPI mis-selling scandal. After the policy started getting popular in the early 2000s, the banking giant thought of taking undue advantage of its power and status. They continued to mis-sell the policy for years without anyone getting a whiff of what they were up to.
Only after the scam unfolded, it was revealed that they had robbed billions off their customers by mis-selling PPI. The damage is so deep that there are complaints which are still pouring in against Barclays and their card-selling branch, Barclaycard.
For years, the bank has been setting aside huge funds only for the purpose of settling PPI claims. In July 2017, the bank was reported to set aside another £700 million to take care of the growing claims.
In spite of Barclays making a pre-tax profit of £2.3 billion in the first six months of the year itself, they have stated that majority of these funds regularly go into settling PPI cases.
Jes Staley, the Chief Executive of Barclays has made a statement saying that they are now in a much better position than they were earlier, and would want to pay more attention to other important issues regarding the development of the company as a whole. The PPI issue does serve as a major distraction, but the bank seems to be coping well with the same.
Lloyds: The Most Notorious Offender Of PPI?
Out of all the commercial banks and card companies involved in the PPI mis-selling scandal, Lloyds Banking Group has perhaps proven to be the worst in the public’s eyes. The banking group has been reported to have caused the maximum damage by wrongly selling the policy to millions of customers. Lloyds has also been reported as the first bank to start with the practice of mis-selling.
The bank recently reported a 4% rise in their pre-tax profit in the first half of the year, valuing £2.5 billion. Along with this, the bank has also declared setting aside £350 million in the first quarter of the year and £700 million in the second quarter, making them set aside another £1.1 billion only for the purpose of settling PPI claims.
In spite of working as hard as possible to solve the claim issues, the bank has still been receiving an average of 9,000 complaints every week. This has handicapped the growth of the institution, as a major chunk of their profits has been going into taking care of the PPI issues.
Lloyds has also been accused of training their employees to dodge questions regarding PPI. On being asked, the employees have often argued instead of accepting the fact that they have committed a huge blunder.
This attitude of the bank has worsened the scenario. Mr. Antonio Horta-Osorio, the Chief Executive of Lloyds has said that there will always be “redress costs” and there will be mistakes that will be made.
However, in spite of setting out a huge PPI provision, the bank is still earning decent profits, as we mentioned earlier. Horta-Osorio also states that the bank has been expanding in the area of consumer lending, comprising of facets like credit cards, personal loans and car finance at a rate of less than 4% over the past six years.
Horta-Osorio is now focused on reducing the bank’s cost-income ratio, which fell to 45.8% from 47.8%. This clearly shows that the bank has been focusing on other important issues and making handsome profits in spite of the blunder it committed for years.
What Are The Consequences Of The PPI Deadline?
The infamous PPI scam has had lasting repercussions. The filing of claims started more than a decade ago, and there are still new cases coming up every other day.
Almost every single day, people are realising that they have been mis-sold the policy and are filing complaints against the lenders with their respective banks and card-companies. For years, various financial institutions have been dealing with the issue of miss-sold PPI and paying back the refund in billions.
The Financial Conduct Authority (FCA) finally decided to put an end to this two-way suffering. It decided to have a deadline for making claims regarding mis-sold PPI, which was originally set in mid-2018.
However, there was a huge uproar against the decision as there were thousands of unsolved and undiscovered cases, which made them shift the deadline to August 2019.
Also, the FCA has asked the banks to use as many platforms as possible in spreading awareness about the issue of mis-sold PPI. This is being done to make sure that more and more people file their complaints before the deadline.
The PPI deadline has had different effects on the customers and lenders. The customers are still in resentment as there may be cases which are yet undiscovered. Though the awareness drive by the FCA would help maximum customers to discover the fact that they were mis-sold, the deadline is still not taken positively by majority of the customers.
On the other hand, it is welcomed by the financial institutions with open arms. They have been seeing the deadline as an end to years of financial suffering. For several years, the banks and card companies have been dedicating most of their time in solving PPI cases. The volume of frequency of cases has been increasing exponentially and there are new cases being registered today as well.
Several banks have said that they are getting diverted from more important issues and haven’t been able to concentrate on the areas of development. Most of their profits are eaten away while repaying the mis-sold buyers. A deadline for claiming PPI would end this issue forever.
However, the banks and card companies have severely suffered due to the delay in the deadline. Due to the gap of more than a year and increased awareness about the matter, the number of complaints has further increased.
Now, the customers want to rush in order to settle their claims before the deadline, and FCA’s order of spreading awareness further increases the frequency of complaints.
After the declaration of delay, certain banks have been receiving thousands of new claims every week. This is what has led the banks to set aside extra funds just to look after the issue of mis-sold PPI.
This scenario is expected to continue for another year till the deadline finally approaches.
In spite of the issues faced by the banks, the delay has been lauded as positive when it comes to the economic growth of the country. Several experts have stated that an increase in the number of claims and compensations would increase the disposable income of individuals, therefore increasing the total disposable income in the economy.
Though this might not be a highly noticeable change, it is still appreciated by analysts, looking at the recent disappointments regarding UK’s economy.
With questions popping up like the ones we’ve covered, you should get a free PPI check as soon as possible just to make see if you’re eligible. If there are any questions, feel free to contact us at iSmart or seek further advice from the FOS or legal companies. Don’t miss out!