Britain’s big banks and other financial institutions are reeling from the fallout of the ongoing payment protection insurance (PPI) scandal that has engulfed practically all of them and sent shockwaves through the industry and its investors.
The cost of PPI refunds and compensation at Lloyds Banking Group alone has now skyrocketed to a total of £18.1bn, the bank reported, including a new allocation of £1.6bn to deal with ongoing and future claims. Despite this, however, the group managed a slight rise in first-half profit, of four per cent, to £2.5bn.
Lloyds says it is currently processing around 9,000 PPI claims per week, many of which are submitted via claims firms that use specialist claims software to handle large amounts of cases. It says it expects this high level to continue up to a deadline for PPI claims that falls two years from now.
Taking a Pounding
PPI was created as a financial instrument to protect people and financial firms from non-payment on unsecured loans, credit cards, vehicle financing and other products. In the event of accident, illness, redundancy or even death, PPI would kick in and payments would continue. The problem was it was pushed on a largely unsuspecting public and the banks creamed off massive amounts of commission for selling it.
After the scandal was unearthed, refunds and compensation for mis-sold PPI began in January 2011. To date, £27.4bn has been paid out by the financial institutions, £260m of it in May this year, the month for which the most recent figures are available. Altogether, 23 British financial firms are responsible for mis-selling PPI and they are the ones making the payments, and funding a large PPI ad campaign about to air.
The Financial Conduct Authority decided earlier this year to impose a deadline of August 2019 on PPI claims, to bring the entire sorry saga to an end. It wants as many people in the UK as possible to check if they have been mis-sold PPI and to make a claim before that date and it intends to remind the public with a multimillion-pound multimedia campaign that is due to get underway soon.
Big PPI Losses
Other banks feeling the squeeze over PPI refunds and compensation include Barclays, which has announced losses amounting to £1.4bn as it set aside £700m more to cover payouts. It is joined by the European arm of US credit card giant Capital One, based in Nottingham, which has also been driven to a loss over PPI compensation and was in the red to a total of £45.4m for all of last year.
Tens of millions of PPI policies were sold and it’s believed there could be millions more claims to come. And with an average payout of around £3,000, many consumers will undoubtedly be eager to make claims within the next two years, triggering a second wave of large-scale claims that will flood the banks and other financial firms. While it’s big losses for the banks, it is big business for claims management companies, which have reaped at least £5bn in fees since they started handling PPI claims.
Consumers are often advised to make PPI claims themselves, and avoid claims firms’ fees, which are based on a percentage of the amount given in refunds or compensation. But as a new Which? survey has found, many people are perplexed by the procedure and don’t know what to, or don’t have the time to deal with the banks. They prefer to let claims firms do the work for them, even if they do slice off a chunk of the awarded cash.