Financial Conduct Authority  

Effectiveness of the regulator

Effectiveness of the regulator

As the payment protection insurance claims deadline passed in August, accompanied by the expected flurry of last minute claims and panicked bankers increasing their compensation pots, the financial sector saw the close of one of the most notorious banking scandals in recent history.

Despite pundits exclaiming shock and awe across the airwaves when the scandal broke in 2011, for those familiar with the financial sector, the fact that the banks were capable of skinning customers to this extent was hardly surprising.

However, peek beneath the floorboards of some of these houses of finance and you uncover an equally rotten foundation; the regulators were obviously aware of issues with PPI before the scandal broke, and just as obviously did little to prevent it.

The question is: were they even able to? Are our regulators toothless when it comes to enforcing their own rules?

Key points

  • The PPI scandal was not surprising to some.
  • The then FSA took a long time to act.
  • The regulators need greater powers.

With the recent announcement by the government that the Financial Conduct Authority will not be allowed to set its own regulatory perimeter, it seems the government is reluctant to allow our regulator more rope with which to trip itself on its own inefficiencies.

None of the problems inherent in PPI – the cross-selling, the difficulties in claiming, even the aggressive sales tactics aimed at the self-employed who would never be eligible to make a claim – were unknown before the first premium PPI product was banned in 2009.

Five years earlier, in 2004, The Guardian reported that just 15 per cent of claimants actually received redress, almost a full year before the then Financial Services Authority started taking action.

By 2005, both The Daily Telegraph and Citizens Advice had added to the pile of reporting, and the FSA finally issued its first report on PPI, criticising poor selling practices and lack of compliance controls.

Little justice for consumers

The ball was finally rolling, albeit slowly – and even if the regulator can find an excuse for being ignorant of the issue until 2005, PPI should have died with this first scathing report.

Yet no fines were levied until 2007, and then only targeted smaller institutions such as Alliance & Leicester, which lost a desultory £7m in fines from an estimated PPI income of £135m.

Losing just over 5 per cent of your ill-gotten gains is hardly an effective fine, nor in any way a deterrent. The larger fines came later and were spurred by the motivating force we all love to hate – the claims companies.

For all the issues surrounding bothersome, sometimes predatory, claims companies, they undoubtedly prompted more consumers to seek redress.

They proved that the PPI scandal had momentum and, arguably, backed the regulator into a corner where larger fines were necessary to avoid falling foul of public opinion.

This wave of claims lasted up until the last minute before the deadline – since it started its redress scheme, Lloyds received 70,000 PPI claims a week.

More scandal

Although far smaller in scale, similar themes arise from the more recent London Capital & Finance scandal. In the first instance, issues of regulator ignorance reared their heads.