Britain’s financial regulator is worried that a new recession could provoke another PPI-type scandal with the banks feeling pressure on their main sources of income.
Jonathan Davidson is director of supervision for retail and authorisations at the Financial Conduct Authority (FCA).
In an interview with the Financial Times he expressed concern for what may happen if the possibility of a new recession becomes reality.
He said that lenders had made a genuine effort to change their culture after being forced to set up the PPI compensation scheme in 2011.
But he is concerned that pressures from an economic downturn could reverse the process and new PPI-type problems could arise.
He told FT correspondent Nicholas Megew: “When things get desperate, banks tend to take more risk.
“Sometimes they take more credit risk, which is why you got the financial crisis. At the same time, they typically take more of what I would call conduct risks, taking more risks in their treatment of customers.”
Mr Davidson was making his comments as the PPI scandal finally came to a close with the midnight deadline on August 29th.
The FCA agreed to the deadline in 2017 after the banking industry finally won their demand for a cut-off point for the flood of mis-selling claims which were costing them billions of pounds in compensation payments.
The total paid out so far is £36 billion, but the official figures are two months behind and millions of new complaints swamped the banks in the final few weeks as consumers raced to beat the deadline.
After extensive research think tank New City Agenda believe the compensation total could go as high as £48.5 billion.
The true figure is unlikely to be known until the New Year when the last minute claims have been settled and the Financial Ombudsman Service (FOS) decides on the last of the appeals it is handling.
Nicholas Megew commented: “The improvements came while banks were benefiting from a uniquely long period of macroeconomic calm, with steady economic growth and default rates on loans near historic lows.
“However, pressure on earnings has risen over the past year, as the economic outlook has deteriorated because of Brexit and global trade tensions. A price war in retail banks’ largest market — mortgages — has also hit profit margins at all of the UK’s top lenders.”
Dominic Lindley of New City Agenda director of policy, is sceptical about the impact of the changes, commenting: “Talk is cheap, but action is expensive and difficult. Culture change remains fragile and there is not yet enough evidence of sustained pressure from bank shareholders.”
Mr Davidson commented that while banks had become better at detecting bad practice in its early stages it could still take more time for them to reach the expected standards.
He said: “Culture doesn’t just come from the top, it comes from history. You’ve got all these middle managers who have been told ‘we need a different culture’. But they’ve become very successful.
They got promoted year after year for 20 years based on a previous culture.”