A $40 Billion Jackpot for the Middlemen

(Bloomberg Opinion) -- All the praise of the City of London's global clout ahead of Brexit will probably ring hollow to anyone sold payment-protection insurance, or PPI.

Britain's banks and brokers churned out more than 50 million of the policies, which were supposed to help borrowers keep up repayments on their borrowings if they lost their job, got sick or died. In the event, many people bought them who didn't need them, weren't aware they'd purchased them, or weren't even covered. Some $40 billion has now been earmarked for customer compensation, making it Britain's costliest banking scandal.

A $40 Billion Jackpot for the Middlemen

The industry had been close to drawing a line under the debacle: the Financial Conduct Authority has given customers a deadline of August 2019 to submit their claims. But the scandal's long tail just keeps getting longer. A court ruling means banks could have to pay an extra 18 billion pounds ($23 billion) in compensation, the Financial Times reported on Tuesday. That may be a boon for victims, but it will also be a boost for the cottage industry of claims processors that has sprung up around PPI.

The latest case centers on the eye-popping fees customers were charged for the pleasure of buying the product – willingly or not. A couple who had been charged a commission of 76 percent of the premium paid were awarded a full refund with interest. That matters because under the FCA's previous guidance, only commissions of more than 50 percent were deemed unfair and only the amount over that threshold was refunded.

Consumers may cheer at the prospect of more redress. But they're unlikely to see all of it. Claims processors take a cut of the money: back in 2014, Citizens Advice estimated third-party firms pocketed about 20 percent of all compensation paid, or 5 billion pounds. If 18 billion pounds more really is on its way, that's 3.6 billion pounds more for middlemen.

The message from the legal industry appears to be that consumers will get a better deal based on this latest ruling. But this could also just create more confusion and raise people's hopes too far. The FCA and the banks it regulates may choose to push their own view rather than settle.

Does any of this matter if the banks and other intermediaries are paying? Perhaps not: at its heart, this is a story of shabby practices in finance. For once, the flow of money is going from banks to customers rather than the other way. But it seems typical of the City that whichever way the money goes, it provides a jackpot for the middlemen.

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