Were PPI payments more of an impact on the UK economy than QE?

Yesterday brought news on a subject that has turned out to be rather like a vampire you cannot kill. This is the issue of compensation for miss selling of payment protection insurance or PPI. Yesterday it bounced back as this from the BBC explains.

People who were not mis-sold PPI policies may be able to claim billions of pounds more in compensation, following a court ruling in Manchester.

Christopher and Joanne Doran were awarded all the sales commission they paid plus interest for a policy, a total of £17,345.

They are the first people to have all of their commission payments refunded for a legitimately sold policy.

This made me think as a bit more than a decade or so ago I worked for the small business division of Lloyds Bank and recall one of the small business managers telling me that the commission on protection insurance for small business lending was 52%. So according to the BBC it now qualifies.

Under the Financial Conduct Authority’s existing guidelines, consumers who were sold their policies legitimately may still be entitled to claim back commission which is deemed excessive.

This means that policy-holders can reclaim any amount of commission that was in excess of 50% of the premium.

I am also reminded that loans could be cheaper with such insurance or to put it more realistically if you did not take it then your interest-rate was higher. As you can see the poor small business borrower was in quicksand pretty much anyway he or she moved.

As to the new development here is an estimate of the possible impact.

But the judge in Manchester ruled that the Dorans were entitled to receive the whole of the commission – in their case 76% of the premium – plus interest.

Paragon Personal Finance, which lost the case, is deciding whether to appeal against the ruling.

Lawyers have claimed the ruling is a new precedent that could mean that banks are liable for another £18bn in pay-outs.

That may or may not be true but does gain some extra credibility from this.

However, sources in the City were sceptical about that figure.

How much so far?

If we move to the total so far from PPI payments then the Financial Conduct Authority or FCA  tells us this.

A total of £389.6m was paid in March 2018 to customers who complained about the way they were sold payment protection insurance (PPI). This takes the amount paid since January 2011 to £30.7 bn.

Actually it is likely to be a little more than that as the FCA believes it only covers 95% of payments. If so the total is more like £32 billion which even in these inflated times is a tidy sum. We also learn something from the back data as whilst payments began in 2011 they really kicked into gear in 2012 and peaked at £735 million in May of that year. That sort of timing coincides very nearly with when the UK economy picked up as back then you may recall the fears of what was called a “triple-dip”.Moving forwards the boost from this source reduced but intriguingly so far in 2018 it has picked up again to just shy of £400 million a month on average.

Economic impact

This is in many respects straight forwards. As the money is the modern version of cold hard dirty cash as it pings into the recipients accounts. A bit perhaps like last night when I heard several RAF Chinooks over Battersea no doubt instructed by Bank of England Governor Carney to be ready to do a Helicopter Money drop should England lose to Colombia. Fortunately his crystal ball was as accurate as ever.The principle being that you get such money and immediately spend it and in the UK that does coincide with our enthusiasm for what might be called a spot of retail therapy.

Another route may well have been the way that car sales responded. Of course there is a mis-match these days between getting a lump sum and paying a monthly lease as so many now do but that does not seem a big deal. Actually measuring this is not far off impossible though. Back in January 2014 Robert Peston who was at the BBC back then had a go.

Over 18 months or so, banks have paid out around £12bn to those mis-sold the credit insurance, out of a total that they currently expect to pay of £16bn.

It represents an economic boost equivalent to circa 1% of GDP – which is big. It is a bigger direct fiscal stimulus than anything either government has attempted since the crisis of 2008, involving more money for example than the temporary VAT cut of 2009.

Perhaps he had been reading some of my output as he also pointed out this.

 the UK’s car market last year returned to the kind of buoyant conditions not seen since before the 2007-8 crash.

There was a rise in motor sales of almost 11% to 2.26 million vehicles, according to the Society of Motor Manufacturers and Traders.

Another potential impact could have been on the housing market as whilst in London the effect may be limited because of the level of house prices elsewhere a PPI payment may well be a solid help in deposit terms.

The reverse ferret here is something perhaps unique in the credit crunch era in that it hurts the banks or more specifically the shareholders. I do sometimes wonder if bank boards are not bothered because lets face it lower share prices may be good for their share options assuming they eventually rise. Also of course they have been on a drip feed of liquidity assistance from the Funding for Lending Scheme and then the Term Funding Scheme.

QE Impact

This is much more intangible. In theory there is a boost from asset reallocation and higher asset prices but that is somewhat intangible and is very different from the “money printing” theory of people getting cash and then spending it. That and the associated impact on inflation has mostly been redacted from the Bank of England website. There was a Working Paper in October 2016 which apart from demonstrating that the authors made a good career choice in not trading financial markets gave us these thoughts.

Bank of England estimates suggest that the initial £200bn of QE may have pushed up on the level of
GDP by a peak of 1½-2% and on inflation by ¾-1½% (Joyce, Tong and Woods (2011)).

And also this.

For example, consistent with Weale and Wieladek (2016), evidence in the US (Figure B1.7 in Appendix B) suggests that a 10% of GDP central bank balance sheet expansion has a peak impact on output of around 6% after three years and a peak impact on CPI of around 6% after around seven quarters.

Perhaps they shift to the US because if you look at Appendix B you see that the UK impact is about a third of that and the Euro area impact even less.

Comment

There is a clear moral hazard with the majority of estimates of the economic impact of QE in that they are done by the central banks responsible for it. For example the research above is from the Bank of England and it quotes a paper from Martin Weale who is in effect presented as judge and jury on policies he voted for. So we are much thinner on evidence for its impact than you might think. You may also not be surprised to read that Martin Weale has been an opponent of my campaign to get asset prices represented in the inflation measures.

On the other side the impact of PPI is much more easy to see. The catch here is that of course we have seen a lot of things happen at the same time and it is clearly impossible to be exactly certain about which bit was at play at any one time. We are often more irrational than we like to think so who really knows why person A goes and buys X on day Y? But I think we can be clear that PPI compensation played a solid role in the UK economy recovering and seems set to continue to do so.

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13 thoughts on “Were PPI payments more of an impact on the UK economy than QE?

  1. Great blog as usual, Shaun.

    Since you bring up Martin Weale, have you bothered to read his written submission to the RSS meeting on the future of the RPI? At one point he writes: “I should mention one argument I have heard in favour of the RPI method of measuring clothing price changes. This [i]s that it gives the same weight to the movements of price of expensive items and cheap items. If we calculated the average of the prices of a basket of goods and worked out the change [i]n the price of that basket, then the expensive items would inevitably have more impact than the cheap items. But the solution to that problem is not to put up with the bias that I have described. Rather it is that statisticians choosing the representative basket of goods should do their best to make sure that the basket is indeed representative.” Although Weale doesn’t say it, he is obviously talking about the use of the Carli formula in the RPI. If you have two items and one is 10 times more expensive than the other in the base period, they are both implicitly given the same base period expenditure weight. Of course, the other side of this is that the expensive item is also implicitly given one tenth the quantity weight of the cheaper item. This is precisely why the chain Carli index shows such disastrous upward drift as opposed to the chain Jevons index, and why the ONS initially sought to replace the RPI with an RPIJ. Weale’s suggestion is to make sure that for these low-level aggregates electronic-point-of-sale data or some other data source should be found to remove the need to use elementary aggregation formulas altogether. Then presumably, RPI and RPIJ would show the same result and his objection to its use would vanish. However, he also wants to kill the RPI off as soon as possible and index gilts and everything else by the CPI! Why he would want to do this is a complete mystery as the CPI is a macroeconomic price index and in no way suitable for use in upratings. To look at only the most obvious difference the CPI excludes the expenditures of UK residents abroad from its expenditure weights but includes the expenditures of non-resident tourists and students in the UK. The RPI/RPIJ is based on expenditures of UK residents at home and abroad as an upratings index should be. You don’t have to delve very deep to see that Weale’s recommendations are logically inconsistent and dysfunctional.

    • Interesting comment – I had no idea that any inflation measure included expenditures abroad by UK residents. I have two questions for you:
      1. How on earth do they measure the foreign expenditure by UK residents?
      2. Why (and this is not a hostile question, just probably ignorant curiosity) should the overseas expenditure be included in an index of UK inflation?

      • Hello, James.
        Not to evade your question, but the more important question might be why would the UK government want to use an HICP (since the UK CPI is also the UK HICP) for uprating anything, given it includes foreign students’ tuition fees at UK universities. These will differ in level and rates of change from tuition fees for UK students. It doesn’t happen with the RPI, the RPIJ or the new experimental HCIs. In October 2012, the weighting of tuition fees between foreign and UK students in the UK CPI actually came up in the Bank of England press conference when the February 2013 Inflation Report was released as the tuition fee hikes then were substantial.
        But to your question, the expenditure weights for the RPI come from the Living Costs and Food Survey and the respondents aren’t asked to exclude tourist expenditures when they assign their spending to different categories of food, clothing and so forth. As far as pricing is concerned, foreign prices are ignored, except for foreign package holiday trips and probably air fares, since ONS takes the fares from the Internet. There is no effort to collect tuition fees for foreign universities where UK students study. The price of a foreign hotel room could be part of the RPI if it is part of a package holiday tour but not if it is separately booked. However it could still enter the expenditure weight. The rationale for having these expenditures in the weights, and much more in the pricing than the ONS does now, is that it better reflects people’s actual cost-of-living changes.
        English economists John Astin and Jill Leyland let me vent on this subject in Annex 1B of a paper that was mostly their work at an economics meeting last year in Antigonish, Nova Scotia:
        https://economics.ca/2017/papers/AJ0047-1.pdf
        Since today is American Independence Day, maybe I should say that this is probably more a Canadian than a British concern. There are lots of people living in Ontario who have season’s tickets for the Buffalo Sabres or the Detroit Red Wings in the National Hockey League. I doubt there are many English football fans with season’s tickets in Belgian stadiums, but perhaps I am wrong.

    • Hi Andrew and thank you.

      Cheers for that. It does not surprise me as essentially that is his record where he thinks he is being clever and the establishment promote him. But if you look behind where he has been ( CPIH & Average Earnings) there is invariably trouble.

  2. I always suspected PPI was a massive boost to the failing UK economy, but thanks to Shaun, here is the proof.

    It makes you wonder if it isn’t deliberate government policy for the banks to act as a conduit for the injection of billions of £ into the debt disabled UK economy to keep it afloat, the continuance outlined above makes me think it is being used as some kind of perverse alternative form of QE.

    • Hi Kevin

      It does make you wonder. After all the banks are being propped up in so many ways that they may be a sort of tacit agreement here. I am not enough of a conspiracy theorist to think it started that way more that it happened and some spotted that it could be useful and off the radar screens.

  3. I have always wondered whether the enormous payouts had a different effect, namely that of weakening the balance sheets of the banks, making them more reluctant to write off bad debts and so clean up their balance sheet for future, productive lending.
    On the other hand, it would probably all have gone to the housing market and bankers’ bonuses, so probably better spent on PPI…

    • Hi James

      Your mention of bankers bonuses reminded me of this from March.

      “Deutsche Bank (DBKGn.DE) said on Sunday its 2017 bonus pool would be above 2 billion euros (£1.7 billion), as the loss-making bank seeks to retain staff during a major overhaul………A bonus pool of just over 2 billion euros is significantly higher than the 546 million euros paid in 2016 but below the 2.4 billion euros awarded the year before. The bank sharply curtailed bonus payments for 2016 following speculation that it would need a state bailout to stay afloat.” ( Reuters).

      The last sentence was good of them don’t you think? But the fundamental point is that it can pay large bonuses whilst the bank is obviously troubled. The share price was on the way down ( just below 13 Euros) and in spite of a better week is 9.3 Euros now yet would anyone bet against bonuses being paid next year if it remains there?

      So I think you are right about bankers bonuses.

      • Just shocking to see the figures. You have to hand it to them. Ten years after nearly breaking the whole world, they have taken taxpayers’ money and yet we still allow them to pay bonuses just in case the “talent walks”. Let it walk.

  4. Interesting article, on first glance one would assume the pay-outs benefited the economy.

    Conversely however the banks suffered as a consequence of miss-selling, therefore one could argue the banks balance sheets suffered which hasn’t benefited the economy!

    One could pose a theoretical argument the overall affect nil but the sun got to me again today and I would need to give the matter a lot of thought.

    • Hi Peter

      In ordinary times I would agree with you in that reducing bank balance sheets would affect the economy. But in these days when they get fed so much liquidity I wonder if that applies? We should have put at least some of the zombies out of their and our misery but we didn’t.

  5. Regards inflation, keep an eye out on rampant food inflation due to drought. The Great Yorkshire drought hasn’t even hit the news wires. Looking at the crops in the fields, it looks bad.

    • It is bad (not just in Yorkshire) – getting quite serious now across europe and beyond. Any grain crop (barley, wheat etc) will have severely reduced crop yields, so too vegetables, prices will ramp up.

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