Monday, April 25, 2011

British Courts rule against Lloyds, RBS and Barclays

A  judge in a British court has ruled against the banks on all important issues in a recent case. And two judgements really mattered: first that the Financial Services Authority's principles governing the behaviour of financial firms are a proper basis for compensation awards; and that FSA rules based on those principles are necessary but not sufficient for judging whether financial firms engaged in mis-selling. Frankly if the banks had succeeded in proving otherwise, it would have been utterly disastrous for the whole system of consumer protection in the UK, both the existing system and the new one being erected by the government.

As it turns out, it is the implications of today's ruling for the banks that are serious. Unless they appeal they face having to make compensation payments of around £4bn to around two and a half million people (around a quarter of all PPI policies were allegedly mis-sold). The damage is greatest for the two banks in which we as taxpayers have big stakes, Lloyds and Royal Bank of Scotland - largely because they have the largest shares of the retail banking market. Lloyds faces the biggest bill: both it and RBS look as though they will have to pay compensation in excess of £1bn each.
That Lloyds and RBS appear to have done the most mis-selling in this instance will be seen by some as further evidence that their particularly powerful positions in retail banking is bad for the welfare of consumers - it will be taken as strengthening the argument of the Independent Commission on Banking that reinforcing competition is a priority. The tab for Barclays and HSBC will also be pretty steep - some hundreds of millions of pounds each. It is even more curious that they have fought and fought to limit their liability in the light of the two main examples of mis-selling identified by the FSA.

First there were all those refusals to make payouts under the loan insurance plans to those who had a pre-existing medical condition - when it is clear that relevant customers had no idea that pre-existing medical conditions were grounds for non-payment. Second, it is a logical absurdity that the policies should have been sold by the banks to the self-employed, given that is impossible for a self-employed person to be made redundant. So what next? Well the banks could make those two and a half million victims of mis-selling wait another couple of years to be made whole by appealing to the Supreme Court.

Or they could take the view that the prospects of winning in any court are too slim to outweigh the potential for further damage to their respective public images from being seen to defy an unambiguous legal judgement that they let down millions of their customers. Unless of course they regard their reputations as so impaired that there's nothing left to lose from prevarication.

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