trending Market Intelligence /marketintelligence/en/news-insights/trending/s--pbtXKj6D3PIiPpWgsTQ2 content esgSubNav
In This List

Banks yet to shake free of PPI as claims industry zeroes in on new targets

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Banks yet to shake free of PPI as claims industry zeroes in on new targets

Claims management companies say they expect to work with bank customers on payment protection insurance claims until well into 2019 and will then turn their sights to other cases of bank mis-selling.

Simon Evans, CEO of the Alliance of Claims Companies, which represents claims management firms, said banks' delay in dealing with PPI meant they would still be tackling the issue for months to come.

SNL Image

"Banks are incredibly slow in processing these claims, and always have been," he said. "The volume of claims submitted in the weeks leading up the deadline was also extraordinary. It will take us well into 2020 before these claims work their way through the system."

Useless policies

About 64 million PPI policies were sold by banks to cover debt repayment in the event of illness or unemployment but consumer groups have estimated that about a third of policies were entirely useless.

Banks are now having to compensate customers.

The cost of the scandal to British banks has now topped £50 billion after Lloyds Banking Group PLC and Barclays PLC joined Royal Bank of Scotland Group PLC and CYBG PLC to reveal billions of pounds of extra provisions to deal with it.

The Financial Conduct Authority set the deadline for claims at Aug. 29, and in that month alone Lloyds received between 600,000 and 800,000 "information requests" each week from potential PPI victims. This was far greater even than the 70,000 a week it received at the start of the year. Lloyds said it had set aside £1.2 billion to £1.8 billion as a result, bringing its total to almost £22 billion.

Banks lost a high court battle in 2011 on PPI compensation and considered appealing but António Horta-Osório, Lloyds' then-newly-appointed CEO, agreed to start compensating customers instead and other banks followed suit.

Banks' underestimation of PPI costs has been a constant feature of the industry's handling of the issue. Dominic Lindley, director of policy at think tank New City Agenda said investors should take note.

"Investors need to understand that the default position of firms will be to deflect, deny and delay claims of misconduct," he said.

"Accounting provisions won't reflect the total potential costs and most auditors are not willing to challenge management on assumptions."

SNL Image

He said firms should be required to undertake stress tests which would disclose the total potential costs of misconduct, above and beyond accounting provisions, and publish that information in their financial results.

Switching focus

However, claims management companies, which have roughly halved in number over the past five years from 700 to about 350, do not expect to be out of business when the PPI scandal finally ends, Evans said.

He cited banks' provision of investment advice to customers keen to make use of changes introduced in 2015 that allow customers to access their pension pots from the age of 55 as an area of potential mis-selling. The 2017 restructuring of the British Steel pension scheme led to what MPs described as "a major mis-selling scandal" as tens of thousands of pensioners were targeted by pension firms offering often flawed pension advice, for instance.

Packaged bank accounts, accounts which come with other "benefits" attached, like travel insurance or breakdown cover in return for a monthly fee, also offer a potentially rich vein for claims companies, said Evans.

The Financial Ombudsman Service received 15,606 complaints about pensions and investment advice in the past year, though this pales into insignificance compared with the 2 million complaints about PPI it has received in total. The FOS also received 149,933 complaints about banking and credit. On average it upholds 21% of complaints about PPI and 38% of complaints about everything else.

The banks themselves claim the reforms enacted following the financial crisis, from bonus clawback provisions to the FCA's Senior Managers and Certification Regime, have had an effect.

"The industry has undertaken significant reform over the past decade with improved standards and strengthened personal accountability in place. Staff are no longer incentivized for selling, complaints handling has been reviewed by the regulators and accountability has been significantly improved under the Senior Managers and Certification regime," said banking trade association U.K. Finance.

S&P Global Ratings said the effect of dealing with misconduct was likely to hang over U.K. banks for a long time to come.

"U.K. bank earnings will continue to feel the effect of a steady flow of low-level regulatory fines, the permanent shift to more complaints-driven customer behavior, and sustained aversion to the risk associated with advice-driven sales that continues to constrain sources of fee income," it said.