Banks in the UK have set aside £42 billion (US $59 billion) to cover Payment Protection Insurance or PPI compensation so far (starting 2011). We will look at how much has this compensation contributed to the GDP.
First, some background of PPI.
What is/was PPI?
Payment Protection Insurance or PPI was designed to cover loan or credit card repayments for a year (in most cases) in the event of an accident, long term sickness or unemployment. By design it was a good product but a number of cases of mis-selling were highlighted. For instance, self-employed couldn’t claim on it (in most cases) but were still sold the policy.
Additionally, it was also reported that the terms and conditions in some instances were widely restrictive.
Why are banks paying out?
In 2011, the High Court rejected a judicial review brought by the British Bankers’ Association or BBA against the Financial Services Authority (FSA). It meant banks would need to look at mis-selling of PPI products and compensate customers where there was evidence of mis-selling.
The FSA subsequently became two separate regulatory authorities, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
Then in 2014, another High Court ruling held that one customer Susan Plevin was treated unfairly because she wasn’t told about the large amount of commission (around 72%) taken from her PPI payment – and ruled that this can be used as a new reason to claim for compensation. It meant that if over 50% of a PPI policy cost went as commission to a bank or a lender and wasn’t clearly explained or evidenced then policy holders were due compensation.
How much have Banks paid out so far?
Banks have paid out around £35 billion so far and have set aside £42 billion so far.
Is there a deadline?
The current regulator, the Financial Conduct Authority (FCA) has put in place a deadline for making a claim which is 29 August 2019. It is being widely advertised through different channels.
Who has received compensation so far and how much?
Initially it was estimated the total compensation will be £3 billion (including interest) but that amount is now estimated to be over £50 billion by the time the deadline arrives. Some 12 million pay outs have been made so far.
Most money has been shared by policy holders but Claims Management Companies or Law firms or Lawyers have taken a cut in some cases.
Now to the question of how much the process and financial compensation contributed to the UK GDP?
First, the parts that have contributed to GDP:
Since 2011, up to 20,000 people annually have worked on claim processing. 12 million pay outs totalling £35 billion have been made so far but that number is likely touch £50 billion. Then you have Claims Management Companies or Law firms or Lawyers who have made money out of it.
On an average, some £7 billion has been the direct (financial compensation) contribution to the GDP and indirectly that number is £32 billion (financial compensation, claim processing and the compensation being spent several times) a year which is 2% of the annual GDP. That indeed is a big number.