There is a confrontation brewing now over the problem of “investability” in Britain

This report is taken from this week’s CNBC UK Stock Exchange newsletter. Like what you see? You can subscribe here.

Mission

Few things have captured the imagination of the British public more this century than reparations.

The UK had never had a culture of damages, but things began to change when, in June 1995, lawyers were allowed to bring charges on a “no win, no fee” basis for the first time.

The thinking was that with the courts effectively only being open to the very rich and very poor (the latter supported by legal aid), this would expand access to justice. Warnings that this could lead to unscrupulous and speculative claims from so-called “ambulance chasers” were ignored.

Certainly, by 2000, compensation claims had quadrupled from their level in 1992 and were beginning to appear in areas, such as stress-related problems against employers, where they had not previously been known.

This was then reinforced by the widespread adoption of the Internet and high-profile advertising campaigns by claims management companies such as The Accident Group and Claims Direct. The latter, famous for its slogan “Where there’s blame, there’s a claim”, collapsed after The Sun, the UK’s best-selling newspaper, highlighted how most compensation payments were swallowed up by fees. Appropriately, Claims Direct was later sued for compensation by disgruntled former shareholders on a “no profit, no fee” basis.

But the genie is out of the bottle. Generations of Britons have discovered how easy it is to claim compensation.

This has been highlighted by the scandal surrounding Payment Protection Insurance (PPI) – policies intended to enable borrowers to repay loans if they die, fall ill, or lose their income.

With generous commissions paid to those who sold them, mainly because insurance was often more profitable for the lender than making the loan itself, millions of insurance policies were sold – an estimated 16 million policies between 2005 and 2011 alone. It later emerged that many were mis-sold, with some borrowers wrongly being told they had to take out a PPI as a condition of getting a loan, while others did not even realize they had been sold a policy.

A tsunami of compensation claims followed – again with claims management companies getting a chunk of the payouts – and the scandal ended up costing the banks an estimated £50 billion ($66.3 billion).

Latest scandal

Which brings us to the latest mis-selling scandal sweeping this sector. The way Britons buy cars has changed with a product called Personal Contract Purchasing (PCP). The first was launched as long ago as 1992, by the British company Ford, but the popularity of PCP skyrocketed when the global financial crisis pushed interest rates to near zero.

With a PCP, the motorist pays the dealer a deposit, followed by monthly loan payments over a period of usually two to four years. At the end of the contract, the motorist either pays a final sum to buy the car outright, or – more often – recycles it into a new PCP to purchase a new car.

The beauty of these products was that the PCP only covered the cost of the car’s depreciation over the term of the contract, not its full value, making the monthly installments much lower than a traditional car loan. It has enabled millions of motorists to buy a newer and better car than they would otherwise have been able to afford. By 2016, around nine in ten new cars in Britain were bought this way – ironically, in many cases deposits coming from PPI compensation payments.

But it has since been found that many PCPs, such as PPI, were missold. Some cases involved charging customers unfairly high commissions or purchasing from a dealer associated exclusively with one lender. But most cases — about 11.4 million — saw sellers receive a higher commission if they could convince a customer to pay a higher interest rate on the loan than they would have paid otherwise.

At one point, it looked like the scandal could prove the existence of PPI on wheels, especially after the UK Court of Appeal sided with motorists in a ruling in October last year. Estimates of total compensation paid at £44 billion have begun circulating. The lenders appealed to the High Court, and in January this year, the UK Treasury asked for permission – unusually – to intervene in the case amid concerns from Finance Minister Rachel Reeves that a PPI-sized payout could damage the banking sector’s ability to support the economy.

The Supreme Court rejected that request, but still ruled in August in favor of the industry in two of three test cases. This still leaves the door open to compensation claims, and last week the Financial Conduct Authority, the regulator, said compensation was due on around 14 million contracts entered into between April 6, 2007 and November 1, 2024. It estimated this would cost the industry a total of £11 billion.

Lenders are now raising their allocations accordingly. Lloyds Banking Group, the UK’s largest domestic bank, on Monday raised its provisions to £1.95 billion from £1.15 billion. Close Brothers on Tuesday almost doubled its allocation to £300m, from £165m.

But this may not be the end of the matter. The Financial Conduct Authority (FCA) is still examining how the compensation scheme will work, and in its strongly worded announcement on the stock exchange this week, Lloyds pledged to make “representations” to the regulator. It believes the FCA’s approach to compensation may result in clients recovering more money than their actual losses.

Another affected bank, South Africa’s First Rand, warned that payments included in the FCA’s methodology were not “proportionate or reasonable”.

The financial arms of the automakers are also not happy. The Times reported on Monday that BMW, facing a £200m loss, had sought talks with Reeves.

All of this threatens to drive another wedge between the government and a regulatory body. Marcus Pokerinic, the former head of the Competition and Markets Authority, was ousted in January – while Reeves was meeting business leaders at a Davos summit – amid fears he was not sufficiently committed to growth.

Lloyd’s chief executive Charlie Nunn said in December last year that court rulings such as the one last October created an “investability” problem in the UK.

If Reeves agrees — and the Treasury’s attempt to try to intervene in the case in January suggested it did — it points to a potential showdown with the Financial Conduct Authority.

– Ian King

Top TV picks on CNBC

Emily Sawitz, director and senior industry analyst at RSM UK, discusses the EU’s proposal to cut quotas and increase tariffs on steel imports, saying they would have a “far greater impact” than the 25% tariffs announced by the US.

Former director of communications and strategy in Tony Blair’s Labor government, mental health activist and podcast host Alastair Campbell tells CNBC’s Tanya Breyer about the importance of focusing on mental health – and his advice for UK Prime Minister Keir Starmer as his approval ratings decline.

Simon Pumphrey, head of UK banking at HSBC Innovation Banking, discusses venture capital funding for British companies after the latest data showed companies raised $9 billion in the third quarter alone.

– Holly Eliatt

Need to know

Bank of England warns of “sharp market correction” If sentiment around AI trading declines, that, combined with factors such as rising geopolitical tensions and fragmented trade, could… Leaving the stock market “particularly exposed,” According to the minutes of the latest Bank of England meeting.

Britain’s competition regulators grant Google “strategic market status.” While this designation does not find Google guilty of any wrongdoing, it does open the door to the possibility that the tech company may have to… Make changes to how searches work in the UK

Risk-averse parents are fueling Britain’s ambition crisis, venture capitalists say. The United Kingdom has “A completely different mentality” than the United States Towards risk “It’s a vocation and a vocation,” said Harry Stebbings, founder of 20VC, a firm that manages $650 million in funds. It’s a sentiment widely echoed by other characters.

-Yu Boon Peng and Holly Ilyat

Quote of the week

In the markets

Shares listed on the London Stock Exchange declined last week FTSE 100 index It has lost about 0.3% since last Tuesday. This comes despite the index reaching a record high on October 8, as investors reacted to potential tariffs on steel imported into the European Union.

the British pound It fell 0.8% against the US dollar over the week amid the release of UK unemployment numbers, which were slightly higher than expected by economists in a Reuters poll.

Return on the index 10 gilded years Stocks have fallen this week, trading nearly 4.573% on Tuesday, down from 4.727% a week ago, as bond traders respond to potential renewed trade tensions between the U.S. and China.

-Tasmin Lockwood

Coming

October 16: UK GDP data
October 22: UK inflation data
October 23: CBI Business Optimism Index