The Banks have lost their judicial review into FSA guidelines for calculating compensation payments on mis-sold Payment Protection Insurance (PPI).
This ruling could have a big impact on whether the banks have to pay compensation to millions of customers who were inappropriately sold these insurance products.
It is likely to mean that the banks will have to review all of their past sales of PPI.
More than 200,000 complaints about PPI sales have been made to the Financial Ombudsman Service (FOS), including around 100,000 during the past twelve months.
Three in four of these complaints have been upheld, which suggests that PPI was mis-sold by the banks on a massive scale.
What lessons can we learn from the PPI fiasco?
Banks are never the best entities to sell financial products. Their inherent sales cultures means they are focused on selling products to considers, with suitability and appropriateness coming as an afterthought.
Instead of selling insurance products and investments to their customers, the banks should stick to their knitting; the provision of retail banking services. A focus on these activities would see everyone better off.
The PPI fiasco also suggests that consumers need to be better informed.
Understanding when an insurance product is an optional extra, rather than a compulsory feature of a loan, could have prevented millions of people from unnecessarily spending their money on these products.
The Financial Services Authority, through what was the Consumer Financial Education Body and is now the Money Advice Service, has an important role to play here – with financial education needed to turn people into more knowledgeable and confident consumers.
It is always better to avoid buying an unsuitable financial product, rather than relying on the complaints and compensation system to receive redress in the future.
Assuming the banks do refund nearly three million customers for these mis-sold products, the end result could include the demise of ‘free’ banking. Of course banking is never really free; it is subsidised in part by the profits the banks make from selling products to their customers.
With so much money at stake, and apparantly little in the way of a collective reputation remaining to uphold in the banking sector, the PPI saga could drag on for some time before reaching its logical conclusion.
Photo credit: Flickr/HowardLake
