Brief summary of article: The sale of payment protection insurance (PPI) with products such as loans could have been withdrawn a long time ago, but many banks were hesitant to do this because they were wary of the implications of doing so – especially with regard to profitability and share prices. According to Jayne-Anne Gadhia who worked with the Royal Bank of Scotland, she had discussed with a person of a high authority that the scheme be withdrawn. But the RBS and other banks did not want to be the first to act for fear that share price and profitability would be hit.
The impact is that due to mis-selling of the PPI, the scheme has backfired and now costs the banking industry £12 billion. At the same time, Stephen Hester who was appointed CEO of RBS in 2009 shortly after the bank had withdrawn from the sale of PPI notes that forcing banks to ring-fence may unintentionally increase financial instability. As bankers, Hester and Peter Sands of Standard Charter and António Horta-Osório of Lloyds Banking Group also discuss the recommendations by the Vickers Commission to introduce a leverage ratio of 4 per cent, which they argue could restrict lending.
Personal commentary: The article discusses various measures that have been implemented or are being implemented in the United Kingdom in order to regulate the banking industry. First is payment protection insurance (PPI), which is a package that was sold alongside banks products such as loans as security for repayments in case borrowers fell ill or lost their jobs (Dunkley 2012, Lodge 2012, p. 186). Initially, PPI was a very profitable product, and when companies realised this, they started pushing sales even higher though the products were of questionable value to a number of customers.
In 2008, three customers who had bought the PPI complained that the product was worthless as a form of insurance (Dunkley 2012). Eventually, PPI was assessed by the Competition Commission, which termed it to be “uncompetitive”. In turn the Financial Services Authority asked all vertically integrated banks to make restitution to any customers who had been sold the unsuitable products. The implication of this is that the cost to the banking industry had reached about £8 billion by 2011 (McConnell & Blacker 2012, p.
80). Therefore, as noted by Jayne-Anne Gadhia, the withdrawal of PPI as a bank product was long overdue, though banks were hesitant to do so because of the perceived negative implications. Turning to the issue of forced ring-fencing, the impact of this is that customers could face higher mortgage charges if the government compels banks to ring-fence their high-street operations (Treanor, 2011). This observation is made clearly by Stephen Hester who notes that doing so will increase financial instability in the market.
This is because as banks incur high operational charges they pass them to the customer. This coupled with the high leverage ratios such as the 4 per cent suggested by the Vickers Commission is likely to discourage lending. References Dunkley, J 2012, ‘Payment Protection Insurance: A brief history’, The Telegraph, 20 February 2012, viewed 15 November 2012 < http: //www. telegraph. co. uk/finance/newsbysector/banksandfinance/9093101/Payment-Protection-Insurance-a-brief-history. html#disqus_thread>