The UK has come out of recession over the past year or so and is now the fastest growing of the major European economies. In January the IMF raised its projection for growth in 2014 from its previous forecast of 1.9% to 2.4%.
Outside economists have expressed concern that there has been a significantly larger growth in consumer spending rather than the comparative slump in others like building. What they fail to take into account is that over the past few years, tens of billions being pumped into the economy as a result of a court decision in 2011.
All this is going directly to consumers in the form of compensation for the insurance they were mis-sold when they took out all sorts of loans. Most is coming from the banks which sold the insurance alongside issuing the loans. Monday there was news that a further £1.8 billion (US$2.97 billion) has been set aside by one bank to compensate for mis-selling. Also, refunds to victims of another mis-selling scam will have a claim form sent to them automatically. Refunds for them will amount to another £1.3 billion (US$2.15 billion).
The main amount involved in this has now risen to about £20 billion ($33 billion) and is in the form of provisions that banks and insurance companies have made in their accounts - in other words they expect that that was the amount they have had to (or shortly will) pay out in compensation for mis-sold "Payment Protection Insurance" or PPI.
PPI started as a means of finance companies ensuring that shop credit agreements were repaid. Policies were sold alongside, and later included in the standard credit charges, when customers of these stores purchased an item using the store's own "hire purchase" credit system. The customer paid an insurance premium so that their payments would be covered in the event of sickness or unemployment.
On the face of it that was a sensible precaution had it not been for the incentives the shops had and the high rates charged by these exclusive deals. Banks caught on to the idea and started to sell this insurance, in many cases presenting it as a condition of taking out a loan or mortgage. The insurance was of course provided be the banks' own insurance subsidiaries.
The scandal started to come to light in 1998 when the Consumer Association's magazine "Which?" reported that these policies were useless for up to a third of those sold it because the pre-conditions ruled them out of ever being able to claim. The Daily Telegraph provides a detailed time line of the events after that but briefly a new insurance regulator, the Financial Standards Authority (FSA), started to investigate the mis-selling and issued a series of fines to various stores and banks involved. The organizations argued that a customer had to prove they had been mis-sold and put claiming obstacles in the way, including arguing that statutes of limitations on financial claims limited their liability. The FSA eventually issued mandatory guidelines on how claims should be handled (which led to the 2011 court case when the banks unsuccessfully challenged them).
Companies had already started up offering "advice and help with claiming" - for a fee of course - even though most of the information needed could be collected by the individual if they followed advice from a number of independent sources such as newspapers, web sites and government information. The 2011 decision made claiming even easier and by 2013 these "claims companies" had become so competitive in trying to pick up the last clients who had not made an initial claim that cold, unsolicited calls from people trying to sell their services formed half of all nuisance telephone calls.
Banks had already started to make provisions in the accounts to build up funds to repay PPI at the time of the banking crises that caused the world wide recession. They had however grossly underestimated the effect of these claims on their balance books. Lloyds Bank for example estimated their liability shortly after the 2011 court decision at some £3.2 billion. On Monday, this was increased to £9.825 billion out of a total for all banks and other PPI sellers of about £20 billion. To get an idea of the individual impact of these compensation payments, which includes both the original insurance premiums and interest, is about £2,800 (about US$4,600) per Lloyds customer.
LLoyds/TSB Group was one of the banks that had to be bailed out at the height of the crisis by the UK government with a total cash injection of £37 billion for three banks. Lloyds and the Halifax/Bank of Scotland (HBOS) group were merged with the government taking about 39% of the shares in the combined company. The Royal Bank of Scotland (RBS) needed £20billion for which the government took a 60% stake.
Under government control, these banks have been brought to heel, sharelholder dividends stopped and banker bonuses banned. Monday's announcement about Lloyds also included the news that its oversight regulator had taken it "out of intensive care". This will allow it to apply to reinstate shareholder dividends and make the sale of a further tranche of its shares much more secure. The share price is already above the equivalent price paid during the bailout. A previous tranche to institutional investors in September 2013 of 6% of the total shares raised around £4Bn. Selling the remaining 33% at that price would raise another £22 Bn bringing the government profit on the shares to some £9 Bn.
These shares are however likely to be offered to the general public with a limited public sale alongside institution sales in April of a further tranche and a further large trance in the Autumn in a much larger public sale. Such privatizations have to be priced so that all the shares are sold. This is pitched low enough to attract the general public while trying to maximize the government's income. Usually this is done by the Treasury on the advice of stockbrokers. The record of successive privatizations, including the recent sale of shares in the Post Office, have resulted in fairly large profits for the public who invested, usually a few hundred pounds for those who invested the minimum sum.
Of course it is an open question whether those who will be getting large sums in PPI refunds from Lloyds will go on to buy shares in the company (although I have a feeling many will do so out of a sense of revenge).
There is however another much larger group of up to 7 million who will soon be getting a refund typically between £100 to £300 as a result of another mis-selling scam by financial companies. This involved credit card companies selling credit card "identity theft" insurance. This offered to limit liability for fraudulent payments made by a stolen or cloned card and to ensure the card was replaced. In many cases customers were under the impression that if they took out the insurance, they would be automatically approved to get a card. The companies' problems were that the existing law limited liability and card companies issued replacement cards anyway. This from the programme notes for a morning TV magazine show on a regular segment from Martin Lewis, a widely respected personal finance expert:
Up to seven million people were mis-sold credit card and identity theft cover from Card Protection Plan or banks selling CPP. In total, £1,300,000,000 has been put aside to pay them back. Now, anyone who was mis-sold to is able to claim after the High Court approved a redress deal last month.
Just makesure you return the claim form, which should be posted to you this month. CPP has already been in touch with affected CPP customers by post. But if you haven’t had a letter, you can contact the scheme team on 08000 83 43 93. I’ve already heard of big payback successes.
Lewis goes on to quote one case where the refund was £461. The irony of this one is that those most likely to have taken out the insurance in order to get a card would probably be among the poorer and less knowledgeable about personal finance, exactly the group for who a few hundred pounds to replace a broken down TV or washing machine would be most valuable.
The UK population is about one fifth of that of the USA. Imagine what the effect would be of having American banks putting $175 Billion directly into the pockets of ordinary US citizens over the past couple of years.