Yesterday brought news on a subject that has turned out to be rather like a vampire you cannot kill. This is the issue of compensation for miss selling of payment protection insurance or PPI. Yesterday it bounced back as this from the BBC explains.
People who were not mis-sold PPI policies may be able to claim billions of pounds more in compensation, following a court ruling in Manchester.
Christopher and Joanne Doran were awarded all the sales commission they paid plus interest for a policy, a total of £17,345.
They are the first people to have all of their commission payments refunded for a legitimately sold policy.
This made me think as a bit more than a decade or so ago I worked for the small business division of Lloyds Bank and recall one of the small business managers telling me that the commission on protection insurance for small business lending was 52%. So according to the BBC it now qualifies.
Under the Financial Conduct Authority’s existing guidelines, consumers who were sold their policies legitimately may still be entitled to claim back commission which is deemed excessive.
This means that policy-holders can reclaim any amount of commission that was in excess of 50% of the premium.
I am also reminded that loans could be cheaper with such insurance or to put it more realistically if you did not take it then your interest-rate was higher. As you can see the poor small business borrower was in quicksand pretty much anyway he or she moved.
As to the new development here is an estimate of the possible impact.
But the judge in Manchester ruled that the Dorans were entitled to receive the whole of the commission – in their case 76% of the premium – plus interest.
Paragon Personal Finance, which lost the case, is deciding whether to appeal against the ruling.
Lawyers have claimed the ruling is a new precedent that could mean that banks are liable for another £18bn in pay-outs.
That may or may not be true but does gain some extra credibility from this.
However, sources in the City were sceptical about that figure.
How much so far?
If we move to the total so far from PPI payments then the Financial Conduct Authority or FCA tells us this.
A total of £389.6m was paid in March 2018 to customers who complained about the way they were sold payment protection insurance (PPI). This takes the amount paid since January 2011 to £30.7 bn.
Actually it is likely to be a little more than that as the FCA believes it only covers 95% of payments. If so the total is more like £32 billion which even in these inflated times is a tidy sum. We also learn something from the back data as whilst payments began in 2011 they really kicked into gear in 2012 and peaked at £735 million in May of that year. That sort of timing coincides very nearly with when the UK economy picked up as back then you may recall the fears of what was called a “triple-dip”.Moving forwards the boost from this source reduced but intriguingly so far in 2018 it has picked up again to just shy of £400 million a month on average.
This is in many respects straight forwards. As the money is the modern version of cold hard dirty cash as it pings into the recipients accounts. A bit perhaps like last night when I heard several RAF Chinooks over Battersea no doubt instructed by Bank of England Governor Carney to be ready to do a Helicopter Money drop should England lose to Colombia. Fortunately his crystal ball was as accurate as ever.The principle being that you get such money and immediately spend it and in the UK that does coincide with our enthusiasm for what might be called a spot of retail therapy.
Another route may well have been the way that car sales responded. Of course there is a mis-match these days between getting a lump sum and paying a monthly lease as so many now do but that does not seem a big deal. Actually measuring this is not far off impossible though. Back in January 2014 Robert Peston who was at the BBC back then had a go.
Over 18 months or so, banks have paid out around £12bn to those mis-sold the credit insurance, out of a total that they currently expect to pay of £16bn.
It represents an economic boost equivalent to circa 1% of GDP – which is big. It is a bigger direct fiscal stimulus than anything either government has attempted since the crisis of 2008, involving more money for example than the temporary VAT cut of 2009.
Perhaps he had been reading some of my output as he also pointed out this.
the UK’s car market last year returned to the kind of buoyant conditions not seen since before the 2007-8 crash.
There was a rise in motor sales of almost 11% to 2.26 million vehicles, according to the Society of Motor Manufacturers and Traders.
Another potential impact could have been on the housing market as whilst in London the effect may be limited because of the level of house prices elsewhere a PPI payment may well be a solid help in deposit terms.
The reverse ferret here is something perhaps unique in the credit crunch era in that it hurts the banks or more specifically the shareholders. I do sometimes wonder if bank boards are not bothered because lets face it lower share prices may be good for their share options assuming they eventually rise. Also of course they have been on a drip feed of liquidity assistance from the Funding for Lending Scheme and then the Term Funding Scheme.
This is much more intangible. In theory there is a boost from asset reallocation and higher asset prices but that is somewhat intangible and is very different from the “money printing” theory of people getting cash and then spending it. That and the associated impact on inflation has mostly been redacted from the Bank of England website. There was a Working Paper in October 2016 which apart from demonstrating that the authors made a good career choice in not trading financial markets gave us these thoughts.
Bank of England estimates suggest that the initial £200bn of QE may have pushed up on the level of
GDP by a peak of 1½-2% and on inflation by ¾-1½% (Joyce, Tong and Woods (2011)).
And also this.
For example, consistent with Weale and Wieladek (2016), evidence in the US (Figure B1.7 in Appendix B) suggests that a 10% of GDP central bank balance sheet expansion has a peak impact on output of around 6% after three years and a peak impact on CPI of around 6% after around seven quarters.
Perhaps they shift to the US because if you look at Appendix B you see that the UK impact is about a third of that and the Euro area impact even less.
There is a clear moral hazard with the majority of estimates of the economic impact of QE in that they are done by the central banks responsible for it. For example the research above is from the Bank of England and it quotes a paper from Martin Weale who is in effect presented as judge and jury on policies he voted for. So we are much thinner on evidence for its impact than you might think. You may also not be surprised to read that Martin Weale has been an opponent of my campaign to get asset prices represented in the inflation measures.
On the other side the impact of PPI is much more easy to see. The catch here is that of course we have seen a lot of things happen at the same time and it is clearly impossible to be exactly certain about which bit was at play at any one time. We are often more irrational than we like to think so who really knows why person A goes and buys X on day Y? But I think we can be clear that PPI compensation played a solid role in the UK economy recovering and seems set to continue to do so.