Borrowing money can be a risky business. So, in theory, payment protection insurance (PPI) sounds like a sensible precaution to take – a financial safety net in case loan repayments suddenly become difficult to make because of redundancy or illness.
But charging customers to insure their own borrowing has ended up costing British banks a fortune in compensation, because of the way PPI was sold – or rather mis-sold – to customers. It has also cost them dearly in terms of trust.
Some banks (and other credit providers) told customers that PPI was compulsory, or added it to products without the customer’s knowledge. In some cases, it was sold to customers who were not eligible to claim, like the self-employed.
With the PPI claim deadline looming at 11.59pm on August 29, more than £35.7 billion has already been paid in compensation, with the average pay-out coming to around £2,000, and the largest sum hitting £175,000.
That PPI deadline was partly set to allow banks to finally draw a line under the scandal, move on financially and repair consumer trust. But given the actions taken by banks, trust repair is unlikely – and the sector will remain damaged for many years to come.
One reason for this is simply that not everyone entitled to compensation has been paid. According to the industry regulator, the Financial Conduct Authority (FCA), 64m PPI policies were sold in the UK, mostly from 1990 to 2010.
Millions of customers who were mis-sold PPI have yet to make a claim (for the money they paid, plus accumulated interest), and risk losing out on their share of an estimated £12 billion in unclaimed compensation.
More widely, the PPI scandal has damaged consumer trust in the banks who appear to have consciously prioritised profits over customer interests – a clear failure of integrity.
When customer trust is damaged, companies have various methods they can use to try to repair that trust. But when that trust has been damaged by a lack of integrity, effective options are more limited, because integrity is seen as being controllable and intentional.
With PPI, the banks did little to explain to the general public why they had mis-sold it. Our own research with consumers has identified that most people learned about PPI from the media – and, in particular, the adverts run by “claims management” companies.
Because many banks failed to explain and make sense of the PPI scandal with consumers, the information which subsequently filled this void has further eroded trust.
Trust can sometimes be restored through symbolic acts, such as public apologies, high profile resignations, and the paying of compensation. But our research also highlights a deficiency in the use of such responses by the banks over PPI – particularly the absence of an apology.
The banks were, of course, initially fined and ordered to pay compensation to their customers. But again this is unlikely to restore trust.
To begin with, the payment of compensation was not voluntary – it was enforced by the industry regulator, and customers had to apply rather than receive it automatically. To make matters worse, the FCA also found that some banks were unfairly rejecting valid claims.
The use of a deadline for claims is also problematic, because although it enables banks to better manage their funds, it also puts pressure on customers to claim within an imposed timescale.
And while many people have received compensation, even this has not been found to be very effective in restoring trust lost due to a failure in integrity.
Banking on trust
To successfully restore trust, the banks needed to display clear evidence of an intention to get rid of negative influences, embedding ethical values into their routine actions and decisions. We found that customers have not seen this kind of voluntary change in behaviour.
The main problem with trust damaged through lack of integrity is that consumers are not easily convinced that it will not happen again. It seems plausible to suggest that PPI was not the first time banks have displayed a lack of integrity, and nor will it likely be the last.
And thanks to a general lack of knowledge about the financial services sector, consumers often fail to differentiate between different providers and institutions. As a result, any misdeed by a single company tends to contaminate the sector as a whole.
So after August 29, banks should not assume that all has been forgiven. As a deadline, it has been reasonably successful in encouraging valid claims. But its secondary purpose of enabling the banks to draw a line under the scandal is less clear cut.
Yes, the banks can draw a line in terms of ring-fencing payments which will enable them to move on financially. But in terms of rebuilding trust, many consumers will continue to feel that the banks owe them a considerable debt.