Will the bankers hand back their ill-gotten PPI bonuses?

It is now time to seize the bonuses of bankers. Or at the very least that part of the bonuses earned against the illusory profits selling Payment Protection Insurance. It is possibly the most free-market bonus grab that could possibly be imagined.

Today the Banks threw in the towel on a legal challenge, a bank boss almost apologised, and more than three million people were put in line for compensation for a product meant to cover customers unable to keep up payments on credit cards, loans or mortgages, after for example a job loss. Millions now could get a windfall of sorts – but it’s money that they never should have been charged in the first place.

First some background on the fabulous reservoir of superprofits that the Banks bathed in from this awful product.

What marks this out as the biggest misselling scandal in British history is for me ths scale of the profitability for the Banks. High prices, and very few claims. A measure of this for insurance products is “return on equity”. In 2008 the Competition Commission calculated that the RoE for PPI on unsecured loans was 530%, for ordinary mortgages it was 542%, for credit cards it was 475%, and on remortgages it stood at 577%.

This arose from high prices and very low payouts on the policy, partly because of the benign economy and also because of the footnotes that meant many policies would never pay out.

At its peak in 2003, 4 out of 5 remortgages, and 3 out of 5 personal loans had a PPI product attached. It effectively more than doubled interest rates paid on those loans for worthless cover in many cases. But many people never realised they were buying it or didn’t realise they would never be able to claim on it.

The respected Times journalist Patrick Hoskin put it pretty bluntly: “Not much better than a vast institutionalised racket. Customers.. misled and gouged on an industrial scale”.

So let’s put aside the taxonomy of financial problems, that “mis-selling” suggests mistakes rather than misdeeds. I was contacted by a car salesman who said the commission on PPI sales was around 25%. Much of the selling of PPI was contracted to banking and salesman footsoldiers rather than the banking executives. There can be no doubt that performance-related pay was absolutely fundamental for the whole edifice of selling these wretched policies.

Now one of the ways global financial regulators are pressurising big banks into more sensible behaviour is through “clawbacks”. That if large profits deliver big bonuses in one year, that these should be repaid if those profits prove false. Can there have been a more illusory profit than that booked for the sale of PPI products?

Clawbacks are for the future, but should they not apply to the past? Would the prospect of having to repay a bonus not be the fundamental incentive for avoiding dodgy “mis-sales”.

Bonus is the Latin word for good. Those who earned money selling these shoddy products should surely repay their ill-gotten gains. You might call it a “malus”.

And shop level staff should not be excluded from this. What better way to incentivise a more moral banking sector than to provide incentives for the ground soldiers to rebel against the directions of their bonus-addled executive management. Might we expect the banks which are state-owned to take the lead on this?