7 May 2011
There was a great editorial in Friday’s Guardian. As UK banks including Royal Bank of Scotland, together with the British Bankers’ Association, weigh up whether to appeal the recent High Court ruling that obliges them to compensate customers they effectively swindled out of £9 billion to £10bn (£9,000,000,000 to £10,000,000,000) through the sale of largely redundant payment protection insurance policies, the Guardian puts things into context.
The article states that Lloyds Banking Group’s ‘shock’ decision to set aside £3.2bn to compensate customers it (and banks that it acquired such as HBOS) ‘fleeced’ through misselling PPI policies “reveals the worrying state of an entire industry.” The article added that Lloyds’ first quarter results, showing the bank lost £3.47bn in the quarter to March 3 “paint a picture of a rotten industry practice“.
When the scandal first broke early last decade (as with the alleged £1bn plus Bank of Scotland Reading fraud), the banks’ initial reaction was to go into denial. They went into “stonewall” mode, maintaining the pretence they had done nothing wrong, truculently digging in heels, subverting regulators, sometimes perverting the course of justice and flatly refusing to pay compensation. And until Lloyds’ U-turn last week, it has remained pretty much the same ever since.
In this and in many other cases the banks’ approach has been to hunker down and turn a deaf ear to the mounting chorus of outrage from customers they have cheated and defrauded, the wider public, the regulators and the media — even though it’s clear to anyone with half a brain they have behaved abominably.
The approach forms part of an outmoded culture of British bank boards, whereby directors believed it didn’t matter if their institution treated customers with contempt, became a social pariah, etc… as long as they and their fellow board members could get away it and could continue to award themselves massive pay and bonus packages, and as long as the bank could keep pleasing the City with the chimera of inflated profits (of course, it didn’t matter if these were based on false accounting or on short-termist activities that would blow up in a few years and cause the institution to collapse).
The Guardian leader ended by saying: “The best that can be said for Lloyds is that at least it has woken up to reality. By setting aside more than £3bn to compensate swindled customers, it has done the right thing -– and upped the pressure on RBS and other rivals to follow suit. The bottom line is this: the PPI racket casts a light on how much needs to be done to clean up the banks. Just making the system safer, as regulators are urging, is not enough; it needs to be made more useful. Even in their pomp and glory, British banks lent like drunkards and ripped off their PPI-buying customers. They must not be patched up and allowed to go back to business as usual. Because as PPI reminds us, business as usual was rotten.”
The quicker the banks acknowledge that business as usual was rotten (and following Lloyds’ lead on PPI would be a step in the right direction), and the sooner they turn over a new leaf and demonstrate, through their actions, that talk of caring for customers is more than just window-dressing, the greater Britain’s chance of becoming a sustainable and viable economy and a healthier society. Stranger things have happened.
Update 1: If such a U-turn were to happen, it’s likely to cost the taxpayer who owns some of these banks an arm and a leg since compensation would have to be paid out to a far wider range of ripped-off customers than just the people who the banks ripped off with PPI (…as a result of which the nationalized banks would clearly become much more difficult to re-privatize etc). But then what’s more important in the long term: Having a banking sector that rediscovers some moral fibre, or enabling the government to make a fast buck?
Update 2: Here’s what Kamal Ahmed said about the PPI scandal in the Sunday Telegraph. Among other things he wrote: “Angela Knight, the head of the BBA, should take a leaf out of Mr Horta-Osorio’s book and announce that the trade body is abandoning its appeal.”