Another Insurance Scandal Hits UK - Analyst Blog
Bank-related troubles are far from over in the U.K. The latest
scandal to hit the banking sector involves CPP Group Plc as well
as 13 other major banks and credit card companies. The Financial
Conduct Authority (FCA) has imputed these companies of duping
customers into buying false CPP credit card insurance policies.
The banks and credit card providers embroiled include Morgan Stanley ( MS ), HSBC Holdings plc ( HBC ), Banco Santander, S.A. ( SAN ), The Royal Bank of Scotland Group plc ( RBS ), Barclays PLC ( BCS ), Capital One Financial Corp. ( COF ), MBNA, which is a wholly owned subsidiary of Bank of America Corporation ( BAC ) and Bank of Scotland, a unit of Lloyds Banking Group plc ( LYG ). Additionally, Canada Square Operations, Clydesdale Bank, Home Retail Group Insurance Services, Nationwide and Tesco Personal Finance have been accused as well.
About seven million customers who bought the insurance policies since 2005 will be able to claim a reimbursement of the premiums they paid, along with an interest of 8%. The compensation will likely be paid early next year.
The charges of the FCA come as an additional harassment for British banks, after the impact of a series of litigation scandals and compensation payments. The banking sector in the U.K. has been plagued by litigations related to the wrongful selling of payment protection insurance to customers and interest rate hedges to small businesses.
The Background Story
In 2011, Hamish Ogston - the founder of CPP Group - was awarded the Commander of the Order of the British Empire (CBE) for his services to business and the community. However, just a week later, regulators began their scrutiny of the bank's sale of CPP credit card insurance policies.
The banks and card companies were accused by regulators of introducing customers to CPP Group's products. Many customers were put in contact with CPP Group when they started activating their new bank card. CPP Group then used the opportunity of the call to offer card protection insurance. When a customer bought an insurance policy, the bank used to get a commission.
CPP Group also sold a card protection policy worth nearly £30 a year, designed to cover costs of a lost or stolen card. Another insurance scheme, worth nearly £80 a year, was designed to cover expenses if the customer's identity was stolen. However, CPP Group allegedly misinformed about the risks and consequences of identity theft when these were being sold.
During the period between Jan 2005 and Mar 2011, CPP Group sold 4.4 million policies and generated £354 million in gross profit. Additional policies worth 18.7 million were renewed during the same period, generating an income of £656 million.
The British banking system has yet to recover fully from the financial crisis. Further, the long process of restructuring bailed out banks is hampering the economy. The latest scandal is bound to affect the fragile financial sector and add to its woes.
Notably, the credit card scam has cost CPP Group dearly. A £36 million 3-year refinancing deal from the bank's lenders in the last month saved it from the risk of bankruptcy. Notably, the company has already paid £54 million, including a £10.5 million fine, related to the alleged sale of fraudulent credit card insurance policies. The company also reported operating loss of £3.5 million in the last six months.
However, we believe that increased regulatory surveillance will keep fraudulent practices under check and aid in the economic recovery.
BANK OF AMER CP (BAC): Free Stock Analysis Report
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
CAPITAL ONE FIN (COF): Free Stock Analysis Report
HSBC HOLDINGS (HBC): Free Stock Analysis Report
LLOYDS BANK GRP (LYG): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
ROYAL BK SC-ADR (RBS): Free Stock Analysis Report
BANCO SANTAN SA (SAN): Free Stock Analysis Report
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