Personal Finance

Banking regulator fears return of PPI-type scandals

British banks need “a generation” to fix the cultural issues that led to the payment protection insurance mis-selling scandal, according to the UK’s most senior retail banking regulator, as he warned that bad behaviour could return during the next economic downturn.

Jonathan Davidson, director of supervision for retail and authorisations at the Financial Conduct Authority, said lenders had made genuine efforts to reform since they were forced to set up PPI compensation schemes in 2011.

But he said he was concerned that progress could be reversed if a recession increased the pressure on their main sources of income.

“When things get desperate, banks tend to take more risk,” Mr Davidson said. “Sometimes they take more credit risk, which is why you got the financial crisis. At the same time, they typically take more of what I would call conduct risks, ie they take more risks in their treatment of customers.”

Mr Davidson’s comments, in an interview with the Financial Times, come as banks attempt to draw a line under the UK’s biggest mis-selling scandal as the final deadline for customers to submit compensation claims approaches on Thursday night.

Payment protection insurance was designed to help borrowers keep servicing their debts if they fell ill or lost their jobs. But falling margins on basic products like credit cards and mortgages in the late 1990s and early 2000s encouraged banks to become more aggressive in selling the highly profitable insurance to as many customers as possible, including to those who were ineligible or were not aware they were buying it.

The subsequent clampdown by regulators has so far cost lenders £48.5bn — £36bn in compensation and an estimated £12.5bn in associated administrative costs — 10 times higher than total provisions made to cover payouts for the second largest financial mis-selling scandal of interest rate hedging products.

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New City Agenda, the financial services think-tank, estimated that only around half of PPI customers who could be eligible for refunds have contacted their banks about the product. There are no reliable numbers for the total number of claims because most banks do not report them. However, Lloyds Bank, the biggest culprit in the scandal, said it had settled with 8.6m customers as of the end of June.

The FCA and consumer groups on Wednesday encouraged customers to check whether they may be eligible for compensation as soon as possible amid fears that bank systems may struggle to cope with a last-minute influx of complaints.

Martin Lewis, the founder of, said: “Websites crash. Phone lines get clogged up. You should expect the unexpected to happen with such a huge deadline.”

Lenders have already complained of a surge in “low-quality” complaints ahead of the deadline in the second quarter of this year, mainly from professional claims management companies. Several banks said they were being inundated with requests that did not lead to compensation payouts, but which nonetheless drove down their profits because of the cost of processing the high volumes of inquiries.

The FCA agreed to banks’ demands for a cut-off point for PPI claims in 2017. Lenders claimed lingering uncertainty about payouts would damage their balance sheets by making it harder to raise capital from investors, and argued that consumers have had enough time to complain if they genuinely thought they were mis-sold a product.

Banks have taken several steps to prevent a repeat of the PPI affair, ending practices such as giving frontline staff monetary incentives for hitting sales targets, and recording customer meetings to more easily detect inappropriate behaviour.

The improvements came while banks were benefiting from a uniquely long period of macroeconomic calm, with steady economic growth and default rates on loans near historic lows.

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However, pressure on earnings has risen over the past year, as the economic outlook has deteriorated because of Brexit and global trade tensions. A price war in retail banks’ largest market — mortgages — has also hit profit margins at all of the UK’s top lenders.

Dominic Lindley, New City Agenda director of policy, said he remained sceptical about the impact of the changes. “Talk is cheap but action is expensive and difficult. Culture change remains fragile and there is not yet enough evidence of sustained pressure from bank shareholders,” he said.

The FCA has pushed top executives to take more responsibility for their company’s culture, blaming PPI and other high-profile financial scandals on institutional failures rather than individual “bad apples”. The watchdog introduced stricter accountability rules for senior managers in 2016 and has significantly stepped up the number of formal investigations over cultural failings.

Mr Davidson said the FCA had also become better at detecting bad practice in its early stages but cautioned it would take banks more time to reach the expected standards.

“Culture doesn’t just come from the top, it comes from history,” Mr Davidson added. “You’ve got all these middle managers who have been told ‘we need a different culture’. But, they’ve become very successful. They got promoted year after year for 20 years based on a previous culture.”


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