Complete Blog 8 - No Win, No Fee

Payment Protection Insurance

Has there been anyone in the UK who has not received a phone call asking them if they've been mis-sold PPI (if so I'd also like to know their secret).

But what is PPI and why is it so important that Arnold Schwarzenegger's head is advertising it's claim deadline?

PPI is an insurance contract which ensures loan or mortgage repayments will carry on in the event of one losing their job or becoming ill. It seems like a sensible and worthwhile contract. However, like many things relating to banks in the past, it was abused.

In what ways was it a scandal?

Expensive; the PPI premium added considerable cost to the loan principal. Customers could purchase the same insurance contract from an independent provider for a significantly small total cost.

So why didn't they?

Mis-sold; often PPI was sold as an 'essential' add-on to a mortgage or loan. It was also regularly added to loans without customer knowledge or sold knowingly to customers who didn't fit the criteria to claim.

Ineffective; the terms and conditions were often not fully explained to customers and therefore when they sought to claim, they were not eligible to do so. The contracts were essentially useless for a vast proportion of customers who took them out.

Inefficient; even if you were eligible to claim, there were often lengthy delays and complicated procedures which exacerbated the difficult situation customers were already in.

How was this situation able to come about?

In the 1990's, financial services had just undergone a period of deregulation which was transformational to the industry and led to rife competition. Many banks started to employ a Bancassurance operating model; looking to offer a range of financial services within their branches and this cross-selling opportunity was beneficial for short term profits and perhaps even longer term profits, as in its heyday PPI accounted for over 1/3 of banks' profits!

Early on, banks started incentivising the sale of PPI by providing commission to branch employees, because of the profit it generated. This developed a culture of volume and predatory practice over customers' needs, which the big cheeses at the top of banks were responsible for. Even as a cashier with ethical principles, if you are incentivised, and explicitly told, to sell PPI by senior management you may question your own judgement and succumb to the pressure, which perpetuates the issue.

This has clear similarities to the subprime mortgage selling. The incentivisation of volume led to a relaxation of underwriting standards. It is natural for people to seek to benefit themselves and by incentivising behaviour which can lead to a trade-off between customers' (or any other stakeholders') interests and their own, employees will often let society down and look for self-gain. However, it is therefore down to organisational leaders, who should be aware of this by now, to incentivise the correct behaviour and drive a culture of ethical decision making.

I find myself coming back to this during the blog series again and again, however shareholders must take some blame. They have power to influence the leadership of organisations either through voting rights or by selling their shares. In times of PPI mis-selling, profits were at record levels and questions weren't asked whether this was sustainable or ethical. Yet once the scandal unraveled, they were appalled - only because it impacted the share price.

I know I have mentioned the regulators in several other blog posts, however they are prevalent in the PPI scandal too. I honestly believe financial regulators in the 1980's and 1990's had insomnia and overcompensated for that in the 2000's because they were constantly asleep. They were futile in protecting consumers. They were seemingly unaware, or because of the importance of PPI to banks' profits, were lobbied in order to prolong the scandal.

One thing I despise is not admitting mistakes (or in this case creating a toxic culture where customers were ripped off). The banks hired lawyers to protest their innocence which was overruled by the judge. Repayments of PPI have totaled over £40bn and there is still just shy of 2 years left for those duped to reclaim their money.

Have lessons been learnt? 

The regulators eventually woke up from their slumber and introduced regulation to ensure payment protection insurance is sold as a separate product at a separate time requiring an additional contract, which facilitates good business practices from banks.

For the banks, there has been a lessening in the focus of 'selling'. There is undoubtedly still a culture where branch employees are (less stringently) expected to meet sales targets, however the incentivisation and performance measurement processes are much more aligned to ethical practice.
Perhaps it has gone too far, because I remember when I was going to set-up my help to buy ISA, I arranged a meeting at the bank. I couldn't say I wanted the product, they had to assess my needs and recommend a product based upon them. Further, when I opened my student account, I had to watch a video outlining the terms and conditions of the account to ensure I fully understood what I was getting. This ensures that they cover their own backs after a history of deceit, but is it really what customers want? Certainly I found it more tedious than anything else, but understand it is necessary to protect consumers.

Further, it was interesting having a placement at Lloyds Banking Group, where the largest PPI refunds have been issued. It is arguably because Lloyds are considered a 'low risk' bank that they focused heavily on PPI. Unable to keep up with their peers' profits because of their investment banking divisions, Lloyds saw PPI as an opportunity to compete. In listening to the half year and yearly results calls on placement, provisions were needed for PPI compensation. It always seemed like the Senior Leadership of the Group were fed up with the scandal and wanted it to end. While they were not to blame for the culture that allowed PPI to happen, Banking leaders will be tarred with the same brush as those in charge a decade ago and therefore need to be exemplary in their approach to start rebuilding trust. The multitude of scandals that have occurred in the past decade have drastically reduced this trust and it is up to future and current leaders to ensure these things do not continue into the future.

Healthcare

Where I believe similar unethical principles have been evidenced are in the US healthcare industry. Recent news articles in the FT left me questioning the foundation of our political and economic system. While there are examples of socialism growing in prominence in the UK and other countries, capitalism is largely accepted as the most beneficial economic structure for society. Yet questions have been raised in recent years about the legitimacy of these claims.

The UK is fortunate to have access to free medical care, and this leads to the poorest in society having parity with the richest. In my view, this is an integral part of a more just and indiscriminate society. Yet, it is the US who cannot comprehend this simple idea. I concede that it is difficult to pass judgement on issues in the US because of the cultural nuances with the UK. However, these only go so far and there are universal principles which can be employed and I believe healthcare is one of them

Bureaucracy in the US healthcare industry means that doctors recommending particular drugs have little knowledge of the price, or certainly not price changes. With intellectual property being the source of revenue generation for many corporations, patents on drugs are equally as important. It means drugs' chemical formulae cannot be replicated to provide needed relief, and thus those who own the patents have a monopoly on people's health. With the US health system, and subsequently the drugs required, being controlled by corporations and not the state, it opens the door to abuses and further marginalises those in need.

Martin Shkreli was founder and CEO of Turing Pharmaceuticals, which was set-up 2015. Turing Pharmaceuticals raised $90m in debt and equity financing to acquire the patent and manufacturing license for antiparasitic drug Daraprim. Shortly after, Shkreli raised the price from $13.50 to $750 per pill - a 5000% increase. More recently (December 2017), Avondale Pharmaceuticals bought the rights to Niacor, a prescription-only version of niacin, the vitamin supplement, raising the price by 800% to $295 per bottle. These buy-and-raise strategies are unquestionable unethical, yet by capitalism's standards, they should be acceptable as it is the free market economy at work.

Summary

The PPI scandal and buy-and-raise strategies in the US healthcare industry serve to highlight Laissez-faire does not work, as it appeals to people's intrinsic self-interests. It indicates to me the absolute need for regulation and government intervention to protect the most vulnerable because our whole system of capitalism supports this idea of making profit, even at the expense of other people.