The UK banking world has been rocked by a series of scandals concerning the practice of selling payment protection insurance and the way they fix interest rates. Payment protection insurance, or PPI, is also known as loan repayment insurance. PPI was designed to make sure that loan borrowers would have protection in case they should find themselves in a position where they can not repay their loans. The scandal concerns the alleged mis-selling of these insurance policies, as many of the customers who held them were not even aware that they had purchased PPI. Along with the effects of the PPI case, London’s banks have also had to face down the specter of the continuing Libor scandals.
These PPI loans were sold to people who did not need them. Often, they would be sold to people who were self-employed and could not claim this protection, or were just tacked on to the end of insurance purchases without letting the consumer know. These purchases would pad the commission made by the agent selling the PPI. An initial estimate for payouts when the mis-selling was made public in 2011 was 1 billion pounds. That initial estimate was quite low.
Not only has the PPI scandal affected the UK’s financial world, it continues to have to deal with the Libor scandal. Libor, which stands for London Interbank Offered Rate, is the interest rate that banks charge other banks for borrowing money. In 2008, it was discovered that the bankers in charge of Libor were reporting interest rats that were much lower than they actually were. This allowed bankers to profit on the falsely inflated and deflated rates. Emails clearly showed London bankers colluding with New York traders to keep the rates down for their own benefit. Millions of pounds in fines were imposed on UK banks, and jail time could be handed down to the most egregious actors in the scandal. As of June, some of these bankers are looking like they could be facing up to seven years in prison.
Lloyds Bank, not to be confused with Lloyd’s of London, one of the more respected names in English banking has already paid out 10 billion pounds, and is putting aside another 600 million pounds in case of future claims against the bank. In fact, a more current estimate puts payouts to aggrieved customers at close to 4.5 billion pounds, but even that seems to be an underestimate. Barclay’s, another old banking institution, has added another 900 million pounds to its PPI claims fund, and has seen its profits fall by 7 percent. PPI refund claims has also become big business, with companies looking to help those who were tricked into buying the fraudulent claims get their money back.
The effects of this scandal have had long reaching consequences. Lloyds’ profits are down more than 1 billion pounds in the last year. Worse still, the reputation of thee banks has taken a massive hit. The fixing of Libor and the underhanded PPI selling practices has made London banks and bankers into a vision of thieving, greedy gold diggers. For a bank like Lloyds, this is a major issue. In business since 1765, the last ten years have been a hard time for the venerable institution, and they are battling to win back their reputation.
As fines for the PPI and Libor scandals continue to plague London’s banks, the industry s looking for a way to repair its fortunes and reputation. With banks like Lloyds reporting profits down, and with what profits they have being cut into by fines, it may be a long road to walk.
By Bryan Levy