Tuesday, 2 July 2013

John Lanchester on banks (but off-target)

In the London Review of Books here. Very readable, as Lanchester always is, but unpersuasive.

The only bit I know anything about is the PPI mis-selling business. I worked on a sizeable number of cases coming from one of the big retail banking groups. I can't claim to have seen a statistically significant proportion of the vast number of claims, but I saw a lot. Moreover, I worked with other people who saw more and I've talked to other people who have seen yet other ones and I've read the cases that went to trial.

From that experience, I just don't recognise Lanchester's description of the problem.

Here is what he says went wrong:

"The problem was that the majority of people who bought the policies would not, in the real-life instances for which they were buying the policies, be able to use them. Two categories of people who were not eligible to make claims against PPI were the self-employed and anyone with a pre-existing medical condition. They couldn’t use the insurance, but they were, in their (our) hundreds of thousands, sold it anyway. They weren’t told the basic facts about the insurance they were buying, facts which were not merely marginally relevant or potentially relevant, but which directly contradicted the raison d’ĂȘtre of the policies. The banks sold them to customers in the knowledge that they were not and would never be of any use to them. In many cases, customers bought products which had PPI tacked on, without being told they were being charged a premium for insurance which for many of them was useless. ... They sold policies which they knew did not serve the ends they were supposed to serve ..."

So he says, in a nutshell, that the banks sold lots of combs to bald people.

The reality was subtly, but importantly, different. As Lanchester points out, there is nothing inherently wrong with the insurance products. Typically, they would offer a combination of accident/sickness, unemployment and life insurance designed to pay all or some of the loan if you suffered the insured event in question. Even if you were self-employed or had a pre-existing condition, you would still be covered by the life insurance. Often the unemployment cover did cover self-employed people but subject to tight qualification clauses (for obvious reasons: how can an insurance company be sure that a self-employed person is unable to find work rather than prefers to claim on his policy?).

Look at it from first principles. There are vast numbers of these policies out there. To a first approximation, everyone who was ever sold one is getting their money back (plus interest). They weren't all self-employed or ill. So why do they have a claim?

The facts of various individual cases have gone to Court. When these claims have been heard, before various judges, the banks have tended to win. Some examples from across the country: Davies v Black Horse Ltd [2012] EW Misc 20 (CC); Barnes v Black Horse Ltd [2012] EW Misc 11 (CC) (an interesting one for several reasons, not least because it did involve a self-employed person - but one who was sold the 'correct' policy for self-employed people); Williams & Anor v Black Horse Ltd [2011] EW Misc 21 (CC); and the High Court decision in Black Horse Ltd v Speak & Anor [2010] EWHC 1866 (QB). My experience is that these are all pretty standard cases.

The most shocking thing about these cases, you might think, is not the banks' behaviour but that of the claimants' solicitors. In Barnes, for example, the claim was for £1,500, but the claimant's solicitors were seeking legal costs of £29,876.18 on top. Again, that does not strike me as unusual. We all know about the industry that has built up around PPI claims: the adverts, the unsolicited phone calls, etc etc. Who do you think is paying for all that?

So, if the banks were legally innocent, what was the real problem? In my view, it wasn't a question of selling combs to bald people, or pretending combs were not combs or anything of that kind. The problem was that the banks were selling perfectly serviceable combs, perhaps of a rather cheap and plastic-y variety, but combs nonetheless - but they were massively overpriced. Take Speak, for example. The borrowers wanted a loan of £5,000. They ended up borrowing another £2,012.39 to pay for their PPI policy. With interest on top, they agreed to pay the bank £2,589 for the PPI policy. That's a lot of money to pay for providing some protection for a £5,000 loan.

The real problem was that almost no one, properly advised, who sat down and thought sensibly about whether they would get value for money for buying one of these policies (especially as they were borrowing the premium and so paying interest on top), would really want one. 

You could regard that as a breach of trust between bank and customer. Or you could say: if people are foolish enough to pay too much money for something then that's their look-out, and banks are entitled to make profits. 

By and large, people were told what they were buying, that they had a choice not to buy it and how much they would have to pay for it. It's hard to say that there is any legal wrong was committed. So the banks find themselves in a position where, despite having tried to avoid committing any legal wrongs - and generally succeeding - they are being forced by public outcry and the regulators to pay vast amounts of money to idiot customers (and perhaps some innocent victims too) and the (far from innocent) PPI claims industry. It is not clear to me that that is a massive public good or the appropriate punishment.

So, returning to Lanchester's article, where I know about it, I disagree. What he describes as the biggest scandal in the banking world, something akin to a deliberate fraud on the British public, was really nothing more than a cynical attempt to sell over-priced products. (We don't want the Courts - or the Government - deciding what counts as 'over-priced'.) I don't know that the banks are any more scandalous than the wedding industry or Legoland. After all, as Lanchester points out, they were using the money to cross-subsidise free banking, which people also want.

So where does that leave the other 'frauds' in the article? 

My instinct is that the LIBOR affair is every bit as bad as he suggests. But Standard Chartered? You might think "We had no wilful act to avoid sanctions; you know, mistakes are made – clerical errors – and we talked about, last year, a number of transactions which clearly were clerical errors or mistakes that were made" was off-the-cuff rather than (or as well as) clunky. And have you ever tried to fight the US authorities? This is what they did to a girl who bought some bottled water. This is what happened to the Gibson guitar company. Just imagine the legal advice Standard Chartered was getting as a foreign bank accused of trading with Iran. 

So don't believe everything you read in the papers, even the LRB.

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