PPI Compensation Hounds were Born in the Fiery Hell of Government intervention

A few days ago Ruth Alexander of the BBC wrote about a man who took a telemarketing company to the small claims court and won £220 in compensation.

“Richard Herman from Middlesex felt like he was being hounded by calls and texts from companies telling him they could help him claim back money spent on mis-sold payment protection insurance…”

According to the BBC, complaints about receiving cold calls and texts have reached an “all time high” in the UK.

This is another example of how the use of coercion in the form of well-intentioned government intervention creates unintended consequences in society in the longer term. Several years ago, the UK government forced major banks to set aside funds in order to compensate anyone and everyone who had previously taken out Payment Protection Insurance (PPI), premised on the sweeping assumption that in every instance it was “mis-sold” to them. The amount of money set aside by the banks amounts to approximately £7 billion.

Before the government started dictating the format of credit agreements, PPI was often, but not always, something you had to opt-out of, rather than opt-in to. The government decreed that this was a ‘crime’ and that anyone who had had a PPI policy over the last several years was entitled to get some or all of their money back.

All those who were not aware that they had signed up for PPI simply because they did not make the effort to read their contracts properly are not victims of crime by any rational definition. They are victims of their own carelessness. Furthermore, they had every opportunity to notice that they were paying for PPI if they had only bothered to look at their credit card or loan statements at any point afterwards. The only genuine victims are those who signed contracts that did not explicitly mention PPI anywhere within the agreement, but who were charged for PPI payments thereafter. They and only they are the ones who have a legitimate right to seek restitution. I’m guessing the number of such cases is relatively small, and certainly not anything like in the millions. For the record, neither myself or my partner have ever had PPI on any credit arrangement we’ve had. We read the contracts fully and said no to PPI. It wasn’t a tricky thing to do.

Despite the flimsy premise of the government’s flamboyant PPI compensation gesture, everyone and his dog now believes he is ‘entitled’ to compensation for the PPI policy he used to feel stupid for having and not realising, but now is delighted that he was so careless since the government has decreed his behaviour should be rewarded.

A whopping £2.5 billion was paid out in PPI compensation by banks in 2011 alone. It’s this huge transfer of wealth that is fuelling the PPI compensation claims industry. So much so that claims management companies are spending £2 million each month on advertising. Total pay-outs to date only amount to 58% of the original estimated refund bill, and the total number of PPI claims has increased by 10,000% since 2006.

This whole PPI mania is essentially an opportunity for millions of people to get something for nothing. And the ones taking the considerable hit are banks of course. I’m sure most people will not lose sleep over that, but the fact is snatching money in this way harms us all in the long-term. Firstly, the cost of banking services has increased over the last few years as a result. Secondly, if banks weren’t being forced to set aside billions to cover potential PPI refunds, then that money would be loaned out to productive entrepreneurs. Lloyds bank has £3.6 billion less to loan out, Barclays £1.3 billion less, RBS £925 milion less, HSBC £745 million less and Santander £548 million less. These figures represent a significant amount of employment opportunities and wealth creation for the UK that never came to be because the money has been locked-down by government decree. Sure, some people may have used their PPI pay-outs to start businesses or expand their businesses, but these resources would have been better allocated, from the economy’s perspective, by banks, who have the best knowledge about what enterprises have the best chance of being profitable.

Now that the government is ‘regulating’ yet another aspect of peaceful exchange between people and apparently keeping us all just a bit safer from evil corporations, people are only likely to make even less effort to fully understand the contractual agreements they are signing. After all, why bother reading that credit agreement when the government’s ‘experts’ have already made sure it is ‘fair’ and what is ‘best’ for you? The more responsibility we shift to a group of people we call government for our own welfare, the more carelessly we are likely to act. And carelessness is especially hazardous when it comes to entering into credit agreements. Furthermore, the more actions the government regulates the less free society is.

By the manner in which the government and the media have talked of the “mis-selling” of PPI in the last few years one wouldn’t be surprised if they also accused credit providers of poisoning babies milk or eating kittens. The truth is, however, that PPI is not a scam, but simply an insurance product that people value. You pay something like several pounds a month and if you lose your job or become ill such that you cannot work, then your credit card or loan payments will continue to be made on your behalf by the insurer for a certain period of time. That’s all it is. Many people find it valuable, and that’s why it exists.

As a result of the government’s ‘correcting’ of the supposed deceitful and manipulative ways of the credit market, it inadvertently created a PPI compensation gold-rush. Thousands of new business sprung up almost over night looking to make quick fortunes out of facilitating and processing potentially millions of (mostly illegitimate) PPI compensation claims. This in turn caused a huge increase in demand for the services of telemarketing companies, which further resulted in a surge in cold-calling and unsolicited texts for the UK population to get annoyed by. Take a bow, government.

Mr Herman got some cash and, no doubt, a great deal of satisfaction from his court victory over a marketing company, but I suspect in the time it took him to prepare his case and take it to court he most probably could have earned much more by continuing to do whatever his day job is.

If only Mr Herman had known that he didn’t have to spend days and weeks entangled in the court system in order to solve his problem.

After receiving another PPI call one morning a week or so ago, I wondered if some bright spark out there had made an app to block such calls. Some bright spark had, as it turned out. I downloaded Easy Filter, a free Android app, which is supported by ads but not in an annoying way, and eagerly went about setting it up. The app is respectively unobtrusive on your home screen and only takes up around 4 MB of memory space. It will block calls and texts from unknown or withheld numbers as well as any numbers you save to its blocked list (some call centres don’t hide their phone number). It can even notify you when a call or text has been blocked if you wish. I’ve tested it out and it works. Wonderful.

As for the other mobile phone operating systems, it is possible on both the iPhone and Windows phones to block unsolicited calls and texts from withheld numbers and specified numbers, by using built-in functionality and third-party apps.

Mr Herman reached out to the State whereas I reached out to the app market. We both solved our problem, but the difference is that his solution cost him a great deal more in time, effort and money than mine cost me. The further difference is that my solution came at no forced cost to anyone else, whereas his came at the expense of the rest of society because dispute resolution is a service that is monopolised by the State and therefore funded by taxation.

Government intervention into the credit market and the selling of PPI transformed the minor nuisance of cold calling, which until recently could be shrugged off, into a full-blown annoyance that for many people has become impossible to ignore. Thankfully, liberty, in the form of open-source software, the incredible productivity of the app markets and purposeful action by app creators everywhere, delivered a peaceful solution.

So, the next time you get one of those tiresome unsolicited phone calls or texts from someone asking whether you want to effortlessly claim back thousands of pounds for the PPI you were ‘mis-sold’ many moons ago, remember that the target of your anger should be people in government who arrogantly and foolishly believe that they can make society better by force. Not free markets and freedom.

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