The Unwelcome Legacy of PPI

Believe it or not, Payment Protection Insurance (PPI) was once a good idea. Indeed in fairness, there are some consumers out there who did actually benefit, and who were sold their policies in good faith. But these voices have been drowned out in the clamour of protests from the regulators, consumer interest groups and the media seemingly joyous at the opportunity for yet another spot of 'bank bashing'. And for very good reason.

The volumes and values of PPI policies 'mis-sold' is mind boggling, reflected in the billions of pounds each of the banks – including RBS, Barclays, HSBC and Lloyds – have been obliged to set aside for future claims.

And with the Financial Ombudsman Service (FOS) increasing the maximum compensatory award receivable by wronged customers to £150,000 (up from the previous limit of £100,000), and the Financial Services Authority (FSA) having already handled more than one million complaints from consumers whose complaints had previously been ignored, PPI is an issue that will fill thousands of column inches for many months to come.

But for the collections industry, there is also a problem - an unwelcome legacy to PPI. The problem is that for many who could not maintain their premiums, and who went into debt, those debts have now been sold. And that leaves those businesses which have subsequently bought the debt – our Debt Purchasing members – with somewhat of a headache, and one that a couple of aspirin is not going to solve.

The first thing to say, however, is that this problem is not 'new'. It has, perhaps, been somewhat 'under the radar'. Buyers that have acquired a debt of, say, £5,000 have since discovered that £2,000 of that debt relates to a mis-sold PPI policy. What the buyer/seller have been doing is to reach an agreement whereby the seller gives 40% of the purchase price back to the buyer and recalls 40% of the debt. This has been all well and good while the volumes being handled have been so small. But what happens now that there are hundreds of thousands of cases pending, and that number might run into millions?

Well, what are the options? It could be that in any case where a debt contains an element of disputed PPI, the total debt is bought back; a second option is that only the PPI element is bought, as happens currently; or it could be that the debt stays at £5,000 but remains on hold until the £2,000 'they should not have owed' has been returned to the customer by the bank, at which point the full balance (in our example, the whole £5000) becomes due.

The first option would of course be bad news for the buyers; the second, perhaps the most palatable and pragmatic; and the third a possibility, but assumes that the consumer will use their compensation to help settle the money that should have been owed!

There is another option of course, but of such utopian proportions that is therefore unlikely every to be agreed: the bank could pay the purchaser the £2,000 directly. Sadly, FOS would never allow it.

So where do we go from here? That there is a problem is not in dispute. FOS needs to be briefed on the possible options, through the auspices of the DBSG, buyers need to garner the support of other lender bodies, such as the British Bankers Association (BBA) and the Finance and Leasing Association (FLA) where we have common interests. We will also need the support of the wider collections industry such as Members of the Credit Services Association (CSA). Where collection agencies are used to balances being adjusted, they will still need new processes to be agreed and automated to cope with the avalanche of cases that will be affected.

Like Medusa, this is a monster with many different heads. And just as tricky to slay.

Original article by Leigh Berkley, DBSG Chairman.