Financial mis-selling denotes a deliberate issuance of false information by representatives of financial institutions while selling their financial products or services to unsuspecting customers. It is inappropriate selling of financial services to customers without revealing all details to the customers. Customers who fall prey to financial mis-selling can make a claim if the products were sold to them without being addressed appropriately. In addition, if the terms and conditions of a financial product were not fully explained at the point of selling, a person can still make a financial mis-selling claim (Chan 2014). This arises from the fact that financial institutions have a legal obligation to disclose all the details of their financial services to their customers. The full disclosure should give the clients an ample opportunity to make informed decisions as to whether they need the services and products or not. Clients can also make a financial mis-selling claim if they can prove that a product or service was sold to them to enable them qualify for another financial product or service.
The Payment Protection Insurance
Cases of financial mis-selling have riddled the economic history of the world and caused some of the biggest court cases in the world. The Payment Protection Insurance (PPI) is one of the prominent financial services that have been mis-sold to customers in the recent history. The insurance typically covers customers against unforeseen inability to pay their loans, credit cards or mortgages as outlined in the terms and conditions. The scandal dates back to the 1990s when the idea of insuring financial borrowings was very popular. The insurance policy was supposed to ensure that buyers were able to repay their borrowings in case they fell ill or lost their jobs before fully settling their borrowings. According to financial analysts, the insurance policy was not designed to become a scandal on the outset. However, banks and lenders opted to take advantage of the policy after it became apparent that payment protection insurance was raking in huge profits to the financial institutions. The policy is still hailed as an important step in the financial sector. However, it is necessary to point out that banks only returned about 15 percent of the income gained from the policy. This implies that the lenders lost a lot while banks immensely gained from the insurance policy (Blackmore 2014).
The insurance policy affected several borrowers in different ways, thereby validating their financial mis-selling claims. For instance, most of the borrowers were out of employment at the time they bought the insurance policy. This implies that they did not need the insurance in the first place as they were out of work. It should be remembered that the insurance policy was designed to help repay borrowings in case the borrower lost his or her job. In this regard, clients who were sold the policy while not in employment qualify for compensation because they did not fully qualify for the insurance policy (Chan 2014). In most of the cases, it became apparent that banks did not provide their clients with all the paperwork. This amounted to concealment of relevant information, thereby validating their claims for compensation. Financial experts have also revealed that most clients who purchased the policy were never asked about their employment status. Such critical information was concealed from prospective buyers to dupe them into buying the financial service, much to the profiteering of the banks and other financial institutions. The other group of clients did not need the insurance policy because they had no intentions of making a claim in the future. It means their premiums served no other purpose than to bring profits to the financial institutions (Blackmore 2014).
Although payment protection insurance was a complex product, its terms and conditions were well standardized such that it looked genuine. The financial service became popular in the United Kingdom very quickly, fetching approximately 20 million policies by 2006. However, the financial service had been dogged with negative press coverage right from the mid 1990’s when newspapers revealed that the policies were being sold to clients who could never be able to claim against their insurance policies. In 2005, the Financial Service Authority focused on PPI, thereby prompting consumer advocates to commence investigations into the matter (Blackmore 2014). This in turn triggered an inquiry into the alleged scandal by the Competition Commission, which also concluded that the insurance policy was not competitive as required by law.
In the PPI business, interactions between the participants were quite complex and left consumers confused and vulnerable. In most cases, a borrower would interact directly with a lender. However, if PPI is bundled into the loan package, the lender will have to arrange cover directly with an insurer. Alternatively, the borrower could deem it necessary to approach a broker to arrange for both a loan and PPI insurance cover. According to the UK financial laws, it is the responsibility of the distributor of PPI to assess the product’s suitability for clients. It clears retail purchasers of any wrongdoing in case they found themselves duped into buying an insurance policy they do not need. It is the reason most clients have been able to get compensation after the court ruled in their favor. On the other hand, banks and other financial institutions that reaped from the scandal have been left with huge financial dents after the court ordered them to repay the clients (Chan 2014).
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Historically, the payment protection insurance has had an extremely low average claims ratio of around 14 percent as compared to household insurance which has an average of 55 percent. This made it quite an attractive venture for most insurers and lenders as it was free money for them. Besides, the process of processing a claim was tedious and designed to frustrate the borrower. For instance, if a claim is to be made a borrower will have to deal with the insurer for restitution of the agreed payment. However, if the claim is declined, the borrower may not be involved as everything will be sorted between the lender and the insurer. The borrower’s expectations of being compensated were more of delusions considering the nature of the insurance policy. For instance, it is clearly difficult to define “illness” because a doctor’s opinion would be required to verify illness. It means the borrower would have to seek the services of a duly qualified medical doctor to validate his or her claims for compensation (Blackmore 2014). It goes without mentioning that the insurance policy was designed to fleece consumers of their hard-earned cash. While it was initially a noble idea that would have reduced borrowers’ burden of repayment in a financially unsafe environment, it was abused by the banks after they had realized its potential to bring them huge profits.
Until 2011, most banks declined to reveal the scale of the scandal, terming it a passing financial cloud. However, after losing an important court case, they had no option but to refund their borrowers. In 2012, they publicly admitted, for the first time, that the repayments could cost them up to 12 billion Euros (Chan 2014). This made it the worst mis-selling scandal ever seen in the history of banking. The cost of settling the claims threatened to push some of the banks out of the market. At some point, newspapers reported that banks were opting to reject insurance claims by their borrowers without assessing the merits of each case. In some cases, the banks flatly refused to accept that some of their customers ever had payment protection insurance, despite the overwhelming documented evidence. This was to frustrate such customers into either giving up or seeking the assistance of the Financial Ombudsman Service, in which case the banks finally paid up. It was a scandal that they could not run away from as the responsibility lied squarely with them. The authorities were not going to let them discourage the customers from pursuing their genuine complaints about compensation.
At the moment, compensation for borrowers who were duped into buying the insurance policy is an ongoing battle. The borrowers can either approach the bank directly or seek compensation through their brokers. Although the brokers certainly help the borrowers get what the financial institutions owe them, this comes at a price (Osborne 2014). The brokers charge the borrowers extra money to be able to follow up their compensation. The pursuit of compensation is a worthy course because the borrowers are refunded huge sums of money they spent unwisely to purchase insurance policies they did not need. Indeed, many people have been compensated all their monies back while other received less compensation. Either way, it is their hard-earned cash that they are getting back. More importantly, borrowers as well as financial institutions have a lot to learn from the scandal in order to avoid unnecessary losses in the future (Blackmore 2014).
Banks and other financial institutions should now understand that they cannot get away with fleecing the general public of their hard-earned cash. Although they can afford to dupe their clients and rake in huge profits, the law will soon catch up with them. In fact, they stand to lose by engaging in such unhealthy practices. For most banks that had used this money elsewhere, they will make huge profits for a long time until they completely repay all the compensations. In addition, it should be clear from the outset that government agencies remain committed to protecting the rights of citizens. They should never let financial institutions engage in unhealthy business practices. The general public and prospective borrowers should learn not to trust their lenders. Although the burden of truth lies with the lenders, they should strive to find all the relevant information before taking any loans or mortgages. It should be clear to them that it is easier to prevent mis-selling scandals by taking charge of their financial deals. Failure to do this could cost them huge amounts of money and time seeking redress in courts of law (Osborne 2014). Consumer organizations should also learn to be on the lookout for unscrupulous business organizations seeking to take advantage of the unsuspecting clients. In this regard, they should do periodical assessment of business deals to ascertain that the general public is getting the right deal. This is their fundamental responsibility in protecting consumers from exploitation.
Financial mis-selling continues to recur throughout history in several nations despite the previous financial losses. Besides, the banks that get involved usually lose their reputation, thereby affecting their customer ratings in the market. This undeniably has a long-lasting effect on their performance in the financial market. It begs the question as to why banks and other financial institutions continue to engage in financial mis-selling despite the negative consequences. In the United Kingdom, there were over 10 billion Euros case of pension mis-selling, 2.8 billion Euros case of endowment mortgage mis-selling and 14 billion Euros case of insurance mis-selling. It is something that will not go away anytime soon if the regulatory authorities do not take a firm stand against such activities. It should be noted that these scandals reduces future job prospects for business leaders and directors who are found culpable of being architects of the scandal. However, the short-term financial gains appear to give them immense confidence that they may not need employment in the future, after all.
As a matter of fact, financial mis-selling continues to happen because directors of financial institutions lack personal ethics. The decisions to engage in mis-selling are undoubtedly made at some board meetings where the directors are important contributors. In light of this, they have the direct responsibility to stop the scandal from being conceived. However, they choose to ignore future repercussions for a bank because what matters to them is financial success during their tenure. They do not care what would happen to the banks after they leave. Indeed, personal consequences these directors can face are flimsy and cannot force them to act in an ethical manner (Hal 2015). For instance, the idea of reducing their chances of getting employment is extremely inconsequential because most bank managers or directors would not seek formal employment after leaving their leadership positions. It, therefore, goes without mentioning that the provision is not punitive enough to force them to act ethically. Although some financial experts argue that most of these scandals start as genuine investments and that they are not primarily meant to be scandals, the directors have a responsibility to report and stop them the moment they suspect it is becoming a scandal.
It is postulated that only organizational ethics can stop the emergence of cases of financial mis-selling. If an organization considers the long-term effects of mis-selling on its financial stability and reputation, it would undoubtedly not allow its directors to engage in such cases. This is the easiest way to put a stop to the mushrooming cases of financial mis-selling. Indeed, financial institutions are limited entities that bear most of the responsibility in case of any eventuality. Managers would rarely be taken to court if there is no adequate evidence to prove that they acted in a negligent manner to stop the scandal. In most cases, they shield themselves from this responsibility by ensuring they do everything right and leave a financial institution to take the legal responsibility (Olson & Marcus 2008). In light of this, the burden squarely falls on the institutions to ensure that such cases do not emerge. They should be firm in their policies so that their directors do not take advantage of weak laws to propagate scandals. This is the only sure way of putting a stop to the history of financial mis-selling in the financial market.
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Nevertheless, the role of the regulatory oversight cannot be underestimated in stopping the culture of financial mis-selling. It is a common practice that financial institutions will always take part in any activity that will reap them financial benefits. In the case of payment protection insurance, the banks only started misleading the public when it became apparent that profits from the policy were immensely high (Hal 2015). They all wanted to get a share of the profits before people could realize it was a scandal. In most cases, the banks did not anticipate that courts would take up the matter and that they would probably lose the case. This gave them false confidence to take an active role in a business that had clearly become a scandal. This means that without a strong regulatory oversight, financial institutions can take advantage of the unsuspecting public to propagate scandals of unimaginable magnitude. Indeed, it took the intervention of the Financial Service Authority in the United Kingdom to ensure action was taken against the banks. Even after the scandal had been revealed, banks still rejected most complaints from customers. This forced more regulatory oversight bodies to come in to help the public get what they deserved. Clearly, the role of these regulatory oversight authorities cannot be underestimated (Conway 2009).
Role of Monetary and Financial Systems
Monetary and financial systems denote the set of institutions through which governments provide money within a country’s economic setup. Currently, the system consists of commercial banks, mints as well as central banks. The search for monetary and financial stability remains elusive in nearly all parts of the world. This is majorly attributable to the persistent changes in policy regimes every time a new administration comes to power. There is no policy regime in the history of the world that has ever achieved sustainable monetary and financial stability. In most instances, financial institutions take advantage of the relative instability to perpetrate scandals. In light of this, governments should strive to ensure their monetary and financial systems are strong enough to protect the general public from exploitation. Although it can never solve all the financial problems in a country, it can prevent several scandals from taking shape. Particularly, central banks should make such policies that would allow them process compensations for complaints arising from mis-selling cases. This should be done at the expense of the financial institutions that propagated the vice. Ideally, it would lessen the burden, which lies on the general public, to start court cases against banks, a venture that is bound to be immensely expensive (Conway 2009).
Roles of Financial Institutions
Individual financial institutions should commit to protecting the rights of consumers even while pursuing financial success. They shouldn’t act in a manner that jeopardizes the interests of the general public or their clients. In this regard, they should establish strong ethical policies to guide their directors in making financial decisions on behalf of the institutions (Hal 2015). This should remain the strongest commitment of commercial banks in regard to protecting the rights of their consumers. Central banks, on the other hand, should provide clear regulatory framework to guide commercial banks. There should be clear punitive measures for financial institutions that fail to meet the ethical standards set by a central bank. Given that the central bank is a regulatory body, a lot is expected from it to put the banking sector in order. Nothing other than a stable and financially secure financial system should be expected from central banks. They owe it to the general public to protect them from unscrupulous behavior of some commercial banks (Conway 2009).
Lately, the Chartered Institute of Internal Auditors has been firm in pushing for more powers to enable its members report undue risks at UK firms rather than just measuring finance levels. They want to play a watchdog role to protect the general public from any exploitation from the banks. Financial experts state that such a move, if granted, will save the financial markets from constant cases of mis-selling and market rigging that continue to erode the confidence of investors in the market (Brown 2008). As the pressure increases on organizations to remain committed to improving standards of behavior, there is need to focus more on the underlying cultures that determine the behavioral trends. This can only be achieved with the input of internal auditors because they understand financial situations of financial institutions better after conducting an audit. Although it started as a mere proposal by the Chartered Institute of Internal Auditors, the idea has gained momentum lately. It is expected that once adopted, the idea will completely change the financial markets and inject more consumer confidence in the markets. Besides, it will be a proof of the government’s commitment to protecting the rights of consumers and preventing them from being exploited by commercial banks (Hal 2015).
In conclusion, cases of financial mis-selling caused some of the biggest court cases in the world. Payment Protection Insurance (PPI) is one of the financial services that have been mis-sold to customers in the recent history. The insurance policy affected several borrowers in different ways, thereby validating their financial mis-selling claims. For instance, most of the borrowers were out of employment at the time they bought the insurance policy. This implies that they did not need the insurance in the first place. The compensation for borrowers who were duped into buying the insurance policy is an ongoing battle. The pursuit of compensation is a worthy course because people are refunded huge sums of money they spent unwisely to purchase insurance policies they did not need. Banks and other financial institutions should now understand that they cannot get away with fleecing the general public of their hard-earned cash. Although they can afford to dupe their clients and rake in huge profits, the law will soon catch up with them.