The former chief executive officer of Lloyds Banking Group has defended his role in introducing payment protection insurance as a product for sale to customers today when he appeared before the Parliamentary Commission on Banking Standards.
Eric Daniels says the discredited product that has already cost his former bank more than £5 billion in funds set aside for compensation said that in the vast majority of cases the product had been sold correctly.
He said: "We believed we were solving a fundamental customer need".
He said it represented "good value" and staff "were not incentivised to do the wrong thing."
He told MPs that the product was designed to bring "peace of mind" to customers and that the majority of policies were not mis-sold.
He also told MPs that he believed 50 per cent of the claims received were bogus and from people who had never been customers of the bank and never took out the product but that many claims were paid out as staff were unable to deal with the volume of complaints.
He said soon after Lloyds lost the high court case against the Financial Services Authority (FSA), staff were unable to judge whether a claim was bogus or not.
Mr Daniels told MPs: "I have heard that a fair amount of bogus claims have been paid out as the number of them was so overwhelming, staff could not tell if a claim was bogus or not in the timeframe set by the ombudsman.
"So a fair amount of claims paid out were not legitimate, certainly in the early days. I am not sure if it is still going on."
The total compensation is expected to reach more than £15 billion after other banks including Barclays and the Royal Bank of Scotland added to the provisions they had already made when publishing their 2012 accounts in recent weeks.
Mr Daniels who became CEO in 2003 and whose employment at Lloyds ended two years ago in February 2011 told the commission that he was “deeply regretful” for the policies that were mis-sold but insisted that most were sold correctly.
Under tough questioning from the chairman of the committee, Andrew Tyrie MP, Mr Daniels said that there had been a “difference in understanding” between the banking sector that introduced PPI and the regulator, the Financial Services Authority (FSA) who had introduced changes to the sales process that governed how the product was sold.
He said: “The vast majority (of PPI sales) are not related to that but to difference of understanding between industry and regulator.”
Mr Daniels was asked by Mr Tyrie what proportion of claims he believed had been mis-sold and replied “200% judging from the number of claims,” referring to how banks have been swamped with claims, some of them spurious.
He said that until 2008, the FSA was happy that scripts shown to potential customers on screen had provided enough information to customers but after this date the FSA required proof that customers had been verbally informed about PPI as well.
A member of the commission, Labour peer, Lord McFall, said there had been a commission rate of 87 per cent, but Mr Daniels claimed that PPI had not been profitable.
Lord McFall accused him of ignoring warnings about the nature of the product.
He said: “It would seem as if the whole world knew about PPI mis-selling and customers being ripped off but the board of Lloyds. You were just going to go on and make your profits.”
However, Mr Daniels insisted that he thought the majority of customers had got good value from PPI.
He said: “I believe customers did know what they were buying. I think they got good value.
Mr Daniel’s successor, Antonia Horta-Osorio decided not to contest a high court judgement that led to compensation for people mis-sold the product and introduced the first of the provisions that has so far cost the bank more than £5 billion.
Mr Horta-Osorio also oversaw the return of £580,000 of Mr Daniels 2010 bonus. Mr Daniels was also denied a £1.2 million bonus for overseeing the rescue takeover of HBOS when it was integrated with Lloyds.
Mr Daniels claimed that Lloyds Banking Group did not have a big bonus culture and that staff were not massively incentivised to sell PPI to customers, although they did receive more points when they sold more.
He said: “The average salary of a member of branch staff who sold PPI was £20,000. The average bonus for those people was 10 to 15 per cent of that.
“Lloyds is not an investment bank, we do not pay telephone number bonuses. We believe outsized bonuses can distort behaviours.”
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