With the deadline for PPI claims in sight, what’s next for UK banks?

By Simone Fassom,
Associate Partner

It’s impossible not to have noticed that recently there has been a renewed energy around the PPI mis-selling scandal and claims for compensation. As the deadline of 29th August fast approaches, the City regulator is urging individuals to make that claim before the time runs out.

According to the FCA, an estimated 64 million PPI policies were sold to UK consumers throughout the 1990s and early 2000s on the promise that in the event of sickness or unemployment, any outstanding debts they had on credit cards, overdrafts, store cards and loans would be repaid. For some it was a valid insurance product which provided financial security. However, for others, such as the retired and the self-employed who found themselves with one of these products, the policy was destined to never pay out. In addition, some policies had numerous exclusions hidden away in the small print which meant that any claim made against it would most likely be rejected.

Although the list of PPI providers is long, ranging from car finance companies to high street retailers, it was the large high street banks who found themselves in the firing line with the regulator and the media. PPI, originally designed as a valid income protection product, was unfortunately linked to steep sales targets. Staff members were incentivised by providers to sell PPI cover along with credit agreements which meant that a significant number were mis-sold in a bid to reach sales targets. It was a scandal of mammoth proportions with PPI providers having paid out a staggering £35.7bn since 2011 in compensation. Banks continue to set aside millions more for the expected influx of claims running up to the final deadline.

There’s no denying that the banks have been hit financially by the scandal. Lloyds Bank’s latest half-year results have revealed another £550million hit from the PPI scandal with profits falling by 7%. So far, the bank has paid out an eye watering £20.1bn in compensation with more expected.

Yet, despite the disastrous impact that the scandal has had on their bottom lines, arguably the most damaging factor in the whole story for the banks is the blow to their reputation. Banks, as they are today, are far removed from what they were 40 years ago. With a branch on every high street, presided over by a bank manager, most often a local man with a familiar face, banks were part of the community. They were the guardians of our savings, the lender of first mortgages and the provider of overdrafts when we needed to borrow some money to help our salaries to stretch that bit further. Banks were symbolic with stability and we entrusted them with our money and our dreams. So, when the scale of the PPI scandal emerged, and the names of the banks involved were revealed, the public were shocked and angered.

In 2011, when the first PPI claims were made, UK banks were still reeling from the aftershocks of the 2008 global financial crisis, a market meltdown which bankers were accused of having a hand in.  Massive amounts of public money were injected by governments globally into a number of banks around the world to prevent them from collapse.  Public sentiment towards the banks and other financial institutions began to shift; by the time of the first PPI claims, it was bordering on disbelief and suspicion. The reputation of the UK banking industry was in tatters.

Fast forward to the current day; banks are gearing up for a last flurry of PPI claims but, come the end of August, what’s next in store for the industry? Some, such as Barclays, have started to turn a profit again, after a number of tough years. Some stock pickers have suggested that the time is nigh for investing in UK banks again, as the PPI payouts come to an end and banking stocks start to turn a decent yield.

In addition, positive moves have been made by the industry to address the sales practices previously employed by financial services providers.  After thorough scrutiny, many high street banks have now largely done away with incentivised sales for staff.

However, UK banks still have a long way to go to repair their reputations with the public. Research out in 2018 from Positive Money revealed that 66% of the UK do not trust banks to work in the best interests of society proving that, despite paying out fines for misconduct, compensating customers and going through major restructuring processes, the banks still have an uphill climb ahead to regain public trust. The end of the PPI payouts may well be in sight for the banks, but there is still much work to be done, lessons to be learnt and public sentiment to be won over.