Payment Protection Insurance Mis-Selling Scandal

Introduction

In the 2000s, during the housing and credit bubbles it came across that unethical or unlawful behavior is more usual to occur in banks when compared to other similar businesses. This behavior was realized in the 2008 financial collapse, however a lot of it has taken place afterwards and continued to the present.

As we know, the business model of banks is risky and their capital is short term. This means that their capital can vanish easily, whereas their assets are long term and can be illiquid, which makes it harder for the bank to sell if capital is needed. However, there is a positive correlation between risk and returns; when reducing the risk, expected returns are reduced by governmental interference in the banking industry. The compromise between increased risk and increased expected return is appealing because in the short term, a risk is not so likely to materialize in comparison to the long term and just as the capital of banks, human capital is also short term. These settings have made that banks decided more standards of practice, as Gary Becker says: ‘an unregulated banking industry is as a Darwinian jungle, with bankers as predators and their customers (and each other) as prey, and so may explain why bankers are prone to cut corners and why banking is a regulated industry’ (Becker & Posner, 2012). Due to the great ratio of risk-reward, banks are eager to edge practices just to keep their profits.

Such a practice is the PPI mis-selling scandal. The definition of PPI (Payment Protection Insurance) that is given by McConnell and Blacker is that ‘PPI is an insurance product that covers borrowers against being unable to make payments (in this case repayments of loans) such as mortgages, credit card balances and unsecured loans, often but not always connected to a specific purchase’ (McConnell & Blacker, 2012).

Analysis

Facts

In this section I will mention the most important facts, which clear the presentation of the issue.

Banks and other financial service companies sold 45 million PPI policies together with personal loans, credit cards and other borrowing between 1990 and 2010 (Farrell, 2015). In 2005, the Citizens Advice Bureau (CAB) filed a ‘super-complaint’ to the Office of Fair Trading, by which the Financial Services Authority (FSA) had ‘already fined several smaller firms for mis-selling’ (Neville, 2012). Since 2005, around 16 million PPI policies were sold (Pollock, 2012). Just in 2011 did the British Bankers Association (trade-body) abandon a lawful confront to the FSA ruling on compensating victims (Tombs, 2013). The FSA believed that the PPI policies are too expensive and unsuitable for most customers.

As per mid 2013, the big sellers of the policies have