PPI is an almost bottomless well of regulatory learning, full of mis-steps, misunderstandings and misjudgements by all concerned.

In some respects, it ought to be controversial to list it beside BCCI and RBS. After all, an unprecedented amount of redress will have been paid out by next August when the time bar takes effect.

Yet listing PPI as a failure isn’t controversial at all and, rather than rehearse what happened, I want to use this blog to explore why this is the case. 

There are, I believe, three main reasons:

The first lies in this quote from the Chairman of Barclays and the furious response it has provoked - see link.

In 2013, when the redress programme was well under way, the Parliamentary Commission on Banking Standards (PCBS) asked the FSA and the banks for their views. We’ll look at the FSA submission below, but it’s first worth quoting part of Lloyds TSB’s (its stance echoed by other clearers):

“LTSB sought to comply with the regulatory requirements and to act fairly towards our customers. And did not believe it was mis-selling PPI policies to its customers. … it believed it was meeting both the letter and the spirit of the regulation and of the FSA Principles for Business and treating customers fairly.”

And then contrasting it with the Which? submission, which described PPI as:

“the biggest mis-selling scandal in the history of retail financial services. …Which? First warned about the dangers of PPI in the late 1990s and have continually highlighted the poor value of this insurance and criticised the inappropriate sales practices.”

A large part of the reason for the continuing furore over PPI, and why it is widely seen as a failure, lies in this continuing fundamental disagreement. The banks continue to feel wronged, while consumer groups see no sense of regret, hear no commitment not to repeat.

The second reason is that, with new provisions still being made, PPI remains a bleeding wound in banks’ P&L. There are four main factors in this, none properly foreseen by either regulators or firms, including:

1. Potential scale of mis-selling: Despite the Which? warnings, neither seems to have properly gauged the potential impact. (N.B. The FSA’s PPI Redress Project was originally due to last only a year.)

2. Gaps in firms’ records: Many organisations, including regulators – see Northern Rock – suffer from this, so it shouldn’t have been a surprise. However, it has greatly hampered firms’ ability to demonstrate where PPI was sold fairly.

3. Claims Management Companies (CMCs): These firms were a genuinely new factor. However, there has since been a blindness to the behavioural attraction of CMCs for consumers who don’t complaints’ processes will be inherently easy, or even fair.

4. Plevin judgement 2014: This court judgement opened another door to potential compensation by concluding that the size of the selling commission for PPI (70% in this case) was often so large that it should have been disclosed to consumers.

The final reason is that, more than other regulatory failures, PPI exposed inherent weaknesses in the regulator’s operating model. The FSA’s own submission to the PCBS draws the following eight conclusions, which reveal what the regulator didn't spot early enough and the relative ineffectiveness of many of its actions:

-  PPI was designed to meet a specific consumer need but was widely mis-sold in an aggressive way…

- PPI delivered considerable profitability to those who sold it…

- PPI was a complex product sold secondary to another consumer purchase; the root cause was a culture in banks that exploited this position…

- The FSA carried out numerous reviews… took enforcement action against 23 firms and 4 individuals, imposed £12.6mn in fines…

- We thought our rules and requirements would improve sales standards… our work should have been better targeted at the key market players.

- We received considerable resistance from firms… firms were more interested in the major revenue stream PPI offered…

- We have taken the lessons from this into our design of the new FCA…. For example, acting quickly to intervene in the promotion of certain products…

- In future the FCA will have a competition objective and increased powers… The FCA will also have direct powers to intervene in the design of products.

Given the FCA’s switch of resources away from direct firm supervision after 2014, its continuing emphasis on tightening “rules and requirements” and the slow-acting nature of competition powers, it remains too soon to say how far the lessons from PPI have really been learnt.