PPI compensation payments could affect UK economy

Of all the bank scandals, payments over PPI mis-selling scandal are likely to have to greatest personal impact on customers

The scandals involving UK banks are coming so thick and fast that it’s hard to keep up. Barclays has been hauled over the coals for fixing the Libor rate, RBS had a massive computer glitch, and now Standard Chartered is in trouble over alleged illegal transactions involving Iran.

For the average bank customer, though, the scandal that will have the biggest personal impact is likely to be that involving the mis-selling of protection payment insurance. The big five UK high-street banks have already set aside £9bn for compensation payments, of which more than half has already been handed out to customers. As the FT noted in a story on Tuesday, the sums involved, which are likely to grow, are big enough to affect the performance of the economy.

The windfall gains from the de-mutualisation of building societies in the late 1990s provides a historical reference point for the PPI payouts. When the Halifax turned itself into a PLC in 1997, 7.5 million customers received shares worth £1,500. The handout was worth 2p off the standard rate of income tax, and while some Halifax customers held onto their investment, others cashed in. New car registrations grew more strongly in 1997 than in either 1996 or 1998, there was a pick up in the growth of retail sales, and consumer confidence improved.

Will the same happen again? Well, new car registrations have been much more solid than might be expected given that the economy has been going backwards for the past nine months. According to data from the Society for Motor Manufacturers and Traders, there have been year-on-year increases in each of the last five months, with sales in July 2012 up 9.3% up the same month in 2011.

Economic conditions are, of course, quite different in 2012 from 1997. Back then, Britain was five years into a strong recovery, while today it is five years into a nasty double-dip recession. It is possible that individuals will squirrel away their PPI compensation, using it to pay off their mortgage or credit card debt.

Yet, estimates by the National Institute for Economic and Social Research, quoted by the FT, show that if PPI compensation reaches the worst-case (for the banks) estimate of £15bn, the upshot could be an increase in GDP of 0.7%.

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