Whether it is due to benchmark rigging, massive payouts to top executives, or failures to lend to house-buyers and businesses, the banking sector continues to make the headlines for all the wrong reasons.
And on Wednesday evening it emerged that RBS Chief Executive Stephen Hester was departing his position - ahead of that bank’s planned return to the private sector.
The news came following two days of difficult developments at another bank that was mired in the bailout crisis of 2008. An undercover investigation by the Times has revealed that Lloyds had obstructed the payment of customer redress to some of those mis-sold payment protection insurance (PPI).
It is claimed the bank assumed all PPI sales were robust and compliant even when evidence existed that fraud was likely in some sales. With a parliamentary report on banking standards due to be released shortly, and the government talking about selling its stake in Lloyds, such a news story is clearly embarrassing for the bank.
But rather than merely using this as another excuse to bash Lloyds we ought to look at what this means for the banking industry, and the way regulation and incentives are structured.
While Lloyds has suggested that the incidences of obstruction were isolated cases, we really need to ask ourselves two questions. Given the ongoing failure to change banking culture, is this outcome surprising? And what should happen next?
The fraud in this case involved salespersons ticking forms indicating the customer wished to obtain PPI, without the customers’ consent. Concerns have been plausibly raised by the Times that by rejecting customers’ claims that such fraudulent behaviour occurred, the customer would be forced to contact the Financial Ombudsman Service to advance their complaint. This would add a significant time delay to the customer receiving redress for their mis-sold PPI.
Further, through rejecting PPI redress claims some customers may lose patience and not bother to contact the Financial Ombudsman Service at all.
The incentives for banks to mis-sell products still remain. PPI is just one of many mis-selling episodes seen in the UK financial services industry during the last 20 years. Mortgage endowment policies, pensions and a range of different investments have all been mis-sold. In these and the PPI cases, customer redress is used as a regulatory tool for compensating customers for financial harm they have incurred in their dealings with the financial services industry. It also acts as a deterrent against future mis-selling by financial services firms.
What is perhaps different about the PPI episode though has been its scale. The costs of pensions mis-selling in the 1990s just exceeded £11 billion in total; by March the total amount paid out in PPI redress has already reached £9.6 billion with more than £20 billion expected to be paid out. Lloyds alone has made provisions of over £4 billion for PPI mis-selling in 2012. In the face of such tremendous costs, clear incentives exist for banks to limit or constrain these outgoings.
Lloyds has also been deficient in handling PPI complaints and customer redress. In February, the bank incurred a fine of £4,315,000 for delaying making PPI customer redress payments. This involved losing more than 24,000 claims and failing to make redress payments on time in 140,000 cases.
Lloyds’ errors have been linked to a host of organisational and management failures. These include copy and paste errors in Excel spread sheets, using of manual and fallible ticketing processes, and facilitating payment cases through unstructured informal communications. It is clear the scale of managing PPI customer redress has challenged Lloyds.
Avoidance and delays
Examples of financial services firms delaying or avoiding paying customer redress are also not hard to find. In the pensions mis-selling episode, delaying redress payments to customers was observed repeatedly and was dealt with through heavy fines and public censure. Royal & Sun Alliance, for example, was fined for delaying payments to 13,500 customers. Rejecting genuine redress claims was also seen in the mortgage endowment policies mis-selling episode.
From examining such past cases persistent concerns arise with both the managerial ability and incentives to address customer redress claims, and also with the corporate perception of customer redress as a regulatory tool. Clearly if a financial services firm facing a regulatory judgement (and in the case of PPI also a judicial review) sees customer redress as a cost to be minimised rather than a past injustice to be righted then things will never be fixed.
So what needs to be done? It is clear the accusations levelled against Lloyds bank need further regulatory investigation. If these accusations are supported, both corporate fines and public censure are important regulatory tools. The use of independent external consultants to monitor customer redress procedures was advocated in past pensions’ cases and could also be helpful here.
If PPI redress cases have been rejected unfairly by Lloyds these should be reassessed in an unbiased manner. Assessment of whether the managers of Lloyds have failed in their regulatory duties is also an option for regulators.
Finally, a greater corporate awareness that customer redress is not a cost to minimised must be developed. And compensation for the banks’ past failings needs to be paid in full, to everyone owed.