It took disaster to prompt even small steps forward from the banksby Andy Davis / April 24, 2013 / Leave a comment
A bank vault: mis-selling by Britain’s major banks has so far cost them £15bn © Chuck Savage/Corbis
Of all the scandals that have tried the patience of savers and investors in the five or so years since the financial crisis began, one stands above them all—the mis-selling of insurance policies linked to bank loans. The true scale of this debacle is still unclear but it has touched millions. Even the squeaky clean Co-operative Bank has found itself embroiled.
The major lenders have so far set aside around £14bn to cover compensation payments, but some believe the figure will eventually reach £15bn or more. The unprecedented size of the scandal over payment protection insurance (PPI) has rightly caught the public’s attention, but its repercussions are making themselves felt in other parts of the financial world, and particularly in the way that British consumers invest their savings.
Few will have seen much about it in the press, but over the past two years virtually all the major banks and building societies have decided to stop offering investment advice to everyone except their wealthiest customers. Barclays was the first to jump, in early 2011, while the most recent was Santander, which said in March that it would close down its advice arm, putting nearly 900 jobs at risk. In doing so, the banks are seeking to head off what might otherwise have become their next major public relations disaster: widespread provision of poor quality and biased investment advice.
The thread that connects the PPI scandal with the banks’ quiet withdrawal from offering mass-market investment advice is not difficult to spot: it’s all about incentives. In the run-up to the financial crisis, large numbers of people were taking out loans and banks knew they could make significant additional profit by selling them PPI policies. So incentive schemes were put in place to encourage frontline staff to sell their socks off, which they duly did with disastrous results. Much the same applies to bank staff who provide investment advice. A significant portion of their rewards over the years has depended on meeting targets, otherwise known as “shifting product.”
If the potential (and actual) problems with this situation are so obvious, the mystery is why it took a scandal the size of the PPI disaster to bring it into the open. At last, however, there are…