Compensation for PPI victims as saga draws to a close

April 25th, 2011

This week the major UK banks lost a judicial review that could have a major impact on whether more compensation has to be paid on mis-sold loan insurance. Banks will now have to look back at past sales of Payment Protection Insurance (PPI), even if consumers have not complained.

Some estimates have said this could lead to a £4.5bn bill for the banks, leading the British Bankers’ Association (BBA), to say it was “disappointed” by the ruling. They have 21 days to ask to appeal. The BBA also said banks would continue to put some fresh cases on hold until it had decided whether to continue its challenge in the courts.

Thousands of people have already received compensation because they were mis-sold PPI policies, which are supposed to repay people’s loans if their income drops because they fall ill or lose their jobs.

The banks challenged the Financial Services Authority (FSA) over guidelines it published last year which said banks should contact all past PPI customers and invite them to complain if they thought they had been mis-sold PPI. But the High Court judge rejected the challenge.

Some PPI sales proved appropriate but the banking industry has been accused of mis-selling them on a huge scale, generating many millions of pounds in profits by selling insurance that people were unaware they were paying for or did not need, or on which they could not claim.
Some of these people have been compensated, sometimes after their case was initially rejected by the banks.

During the judicial review hearings in January, the court was told that implementation of the new guidelines could cost the banks and credit card companies as much as £4.5bn, paid to millions of people.

Customers would have to be repaid their PPI premiums, plus interest, if the bank or other firm concluded that the customer would not have bought the policy in the first place if they had been fully aware of the policy’s details.

A similar reimbursement could be due to those customers that paid for a policy in full up-front.

There have been more than 200,000 cases referred to the Financial Ombudsman Service about PPI in recent years, including 100,000 in the past financial year and now 5,000 each week. About three in four complaints have been upheld in the past.

The Financial Ombudsman Service said there should no longer be any stalling over fresh cases.

The end could now, finally, be in sight for the sorry PPI saga. Customers who have been seriously misled should get their money back and it is unlikely that the banks will try the same scam again. However, I imagine that even now they are figuring out how to increase their profit margins further at the expense of their customers.

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US rating shock vindicates the British approach to debt

April 19th, 2011

This week there has been a shock for the US economy which provides a stark vindication for the economic policies of George Osborne, the Chancellor of the Exchequer. The US has been warned that the credit rating on its government debt could be cut by Standard & Poor’s, the world respected authority on debt management.

S&P is concerned that Democrats and Republicans will not be able to agree a plan to reduce the growing US deficit. It has downgraded its outlook from stable to negative, increasing the likelihood that the rating could be cut within the next two years. The US Treasury responded that S&P had underestimated its ability to tackle the national debt.

S&P said in a statement, “Because the US has, relative to its ‘AAA’ [top-rated] peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable”.

The surprise move sent US and European shares lower. The S&P 500 fell the most in a month, and the US dollar dropped against the euro and Swiss franc. Oil was also sharply lower. In Europe, the main UK, German and French indexes all fell by at least 2%.

The US federal deficit currently stands at $1.4tn (£858bn) and is expected to reach $1.5tn in the current fiscal year. President Barack Obama suggested that the world could plunge into a new recession if the ceiling on money the US can borrow is not raised in the next few weeks, before the current debt limit of $14.3tn is reached.

Mr Obama and the Republicans are locked in a battle over the extent of spending cuts. The Republican-controlled House of Representatives has passed a 2012 budget plan that aims to cut $6.2tn in spending by the government over the next decade. But the bill is not expected to make it through the Democrat-led Senate.

The current fight is over spending from 1 October onwards. Last week, Congress passed a budget bill that would cut $38.5bn in government spending over the rest of the current fiscal year, to 30 September. Last week, Mr Obama laid out his plan to reduce the budget deficit by $4tn over 12 years.

The S&P outlook cut comes after the International Monetary Fund (IMF) warned last week that the size of the US deficit created instability in the financial markets. In a statement, S&P was positive about the general state of the US economy, but said: “We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013.

“If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

The US has the top AAA credit rating on its long-term bonds. Since the US is the world’s largest economy, and its debt is considered the backbone of the world’s financial system, any concern over the US ability to pay its debt creates huge ripples in the world economy.

The statement from S&P is similar to the one that is widely believed to have been ready for release if the Labour Party had clung on to power here in the UK in last year’s general election.

This is a clear sign that, despite what you may hear from union barons, vacuous journalists and other assorted lefties, the stance of the UK government to the budget deficit and associated debt is a practical and necessary one. The cuts that are part and parcel of that are the responsibility of the previous government’s over-spending and if they were not taking place, we would all be in a much worse situation than we are now.

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It is finally becoming easier to get a loan!

April 10th, 2011

February saw consumer and lenders alike adopt a more proactive position with increases in mortgage and unsecured borrowing, figures show. There were 46,967 mortgages approved for house purchases during the month, up 815 on January, the Bank of England (BoE) said.

Remortgaging rose to a 26-month high as people looked to secure cheap deals. Meanwhile, unsecured debt rose by £768m in February, driven by an increase in personal loans and overdrafts.

However, the debt increases and mortgage activity remain relatively low compared with before the recession as confirmed recently by BoE figures showing consumers repaid record amounts of mortgage debt last year.

The number of remortgaging loans approved stood at 35,725 in February, the Bank’s figures show. This was up from 33,972 the previous month, slightly up on a previous high in November, and higher than the average of the previous six months of 31,674.

The figures signal that some homeowners have been signing up to new fixed-rate deals, which are being offered at relatively low interest rates at present. This might be because their current deals have come to an end, but many would be considering the potential of interest rate rises later in the year.

Many analysts have predicted that the Bank of England will increase the Bank rate from its record low of 0.5% in order to control the rising rate of inflation, although there is disagreement as to when this rise will occur.

Total lending to individuals rose by £2bn in February, which was higher than the average of the previous six months of £1.1bn, the Bank said. But in the mutual sector, customers showed some appetite to save following the traditional extra spending at Christmas, according to figures from the Building Societies Association (BSA).

People deposited £150m more into savings accounts than they withdrew in February, compared with a net withdrawal in January. Following the usual withdrawal from savings accounts in January as households pay off their Christmas bills, it is certainly encouraging to see a modest increase in savings balances at mutuals in February.

However, the news about savings does not come before time. With earnings growing at a slower rate than prices, and imminent rises in some tax rates, it is likely to be difficult for households to substantially increase the amount they save over the months ahead.

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