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The £40B PPI question facing UK banks

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The £40B PPI question facing UK banks

Thecost of mis-selling payment protection insurance has cost U.K. banks dear. Butthere may be a lot more to come.

TheProfessional Financial Claims Association, a trade organization representingclaims firms, cited by the FinancialTimes April 4, suggested that, in addition to the £23 billion already paidsince 2011, British lenders could end up paying an additional £22 billion.

Butputting a number on it is far from easy.

"Ihave no clue and I think nobody else has. [The final bill] is very hard tocalculate," Chirantan Barua, a bank analyst at Bernstein, said in aninterview. He pointed out that the initial government cost estimate had been £2billion, and that the banks "had been totally wrong or they would haveprovided one time for it."

Muchdepends upon if and when the U.K. authorities introduce a time limit on claims.Yet this, Barua said, could well have to wait until after the Brexit referendumin June.

Anotherbank analyst, who asked not to be identified, said in an interview that thefour leading U.K. banks — HSBCHoldings Plc, Barclays Plc, Royal Bank of Scotland Group Plc and — had taken£30.7 billion in provisions and paid out £24 billion thus far. He admitted thepast difficulties, if not impossibility, faced by analysts and the banksthemselves in estimating PPI claims, but said he thought the industry was nowproperly provisioned.

"Iam as comfortable as I can be [on that]," he said. "I am assuming[that] a time bar comes in."

PPIcontracts with a value totaling approximately £44 billion were sold in the twodecades prior to 2010. Speaking to S&P Global Market Intelligence, NickBaxter, chairman of the PFCA pointed out that only about £12 billion of netpremiums have been covered by existing settlements and that compound andaccount interest made up the remainder of the redress payments.

Giventhat he sees a potential raise from about £24 billion to well over £40 billionin redress payments, Baxter is opposed to the imposition of a 2018 deadline forclaims, as has been suggested by the Financial Conduct Authority. A delay wouldlikely benefit the PFCA's members.

Onthe basis that 75% of PPI contracts were sold incorrectly, Barua thought theleading U.K. banks might need a further £10 billion in provisions. Andsuch an additional cost would undoubtedly hurt. Even a much lower extraprovision of £4 billion would be a significant drag on future profits, theunnamed analyst said.

Aspokesman for the FCA said claims had ticked upwards in recent times, but saidthis may be to do with whether a time bar comes in or not.

"Overtime we have a seen a gradual dropping off of complaints since a peak in around2012 or 2013," he said in an interview. He was unwilling to reveal theresults of the consultation on the time limit.

Formost U.K. consumers, it has been very hard to avoid the information about thepossibility of PPI claims, not least from claims companies.

JamesDaley, managing director of consumer group Fairer Finance, said in an interviewthat imposing a time bar would now be fair.

"Ispend my time representing consumers," he said. "You have to take astep back and look at the damage this scandal has done to the banking industryand its reputation. It perpetuates the idea that banks and insurers cannot betrusted."

Hesaid at some point trust needs to be rebuilt.

"Thatis not going to happen if every day our mobile phones and email inboxes arefull of PPI compensation [information]," he said. "It is veryfar-fetched to think that there are people out there who have not heard of PPI.Anyone who is interested in pursuing it has already started to do so."

ThePPI complaints procedure has been a challenge to the banking industry. The FCAspokesman said the watchdog thought it right that the banks should investigatetheir own activities but pointed out that significant fines had been imposed onbanks whose PPI claims handling had been unsatisfactory. Lloyds, he said, hadnotably had to pay a £170 million fine. Yet that is small beer compared to thepast and the future potential redress costs.