Britain’s banks are bracing themselves for a new wave of compensation claims likely to be sparked by a £42m advertising campaign urging customers to complain about their payment protection insurance policies.
The campaign by the Financial Conduct Authority is due to launch on 29 August – exactly two years before the cut-off point for any fresh PPI claims – and is being paid for by 18 of the biggest players in the industry.
The FCA hopes the imposition of the deadline will help the industry draw a line under the scandal. It is by far the UK’s costliest misselling scandal, having forced the industry to set aside more than £43bn to handle the claims and pay compensation, according to calculations by the thinktank New City Agenda.
The big four banks – Barclays, Royal Bank of Scotland, HSBC and Lloyds Banking Group – are sitting on £6.5bn of funds to cover future claims. Lloyds said in its interim results this month that the unused £2.6bn proportion of its £18.1bn provision was “consistent with total expected complaint volumes of 5.3m, with approximately 1.2m still expected to be received, including approximately 9,000 reactive complaints per week through to August 2019”.
RBS, which is 71% owned by the taxpayer, has £1.1bn it is yet to use, while HSBC has $1.1bn (£860m). Barclays has not used £2.1bn out of the £9.1bn it has set aside, which it describes as its “best estimate of expected PPI redress”.
In its interim results, Barclays also referred to the advertising campaign starting on 29 August and said its impact is “uncertain but has been considered in Barclays’ provision estimate”.
The sums also include the potential cost of administrating the claims in a scandal that has cost far more than expected. Regulators initially estimated 3 million people might be affected, but four times that figure – 12m – have so far received£27.4bn in total, according to a tally compiled by the FCA.
When Lloyds broke ranks with the industry in May 2011 and started to pay out claims, it set aside £3.2bn which at the time it hoped would be sufficient to tackle the scandal. The bill for Lloyds alone now stands at £18bn.
Ian Gordon, an analyst at Investec, said the parts of the unutilised provisions were “an estimate of all future redress costs through to August 2019. Will that be enough? My guess is no, but almost enough.”
An extra £1bn may be needed across the industry – but, he cautioned, “most of us have been wrong here many times before”.
Up to 60m policies were sold, the majority before 2005. While 12 million people have made claims, this could equate to between 20m to 24m policies as some customers had more than one.
The FCA head, Andrew Bailey, justified the decision not to force banks to write to customers, instead putting the onus on customers. In a comment piece for the Mirror, he said: “We don’t believe this would work. How many times have you ignored a generic letter through your door?”
Bailey added: “Most of us see reminders every day of the PPI scandal from calls on our phone and adverts in newspapers. Yet there remain a large number of people who may be entitled to complain but have not yet made a complaint.”
Nick Baxter, independent chair of the Professional Financial Claims Association, said that the FCA data showing £24.7bn had been paid out “presents the illustration of progress but we’re only part way there”.
This is because the FCA’s data does not separate out the interest customers receive from the premiums that are being repaid. About half the total payouts are thought to cover interest which, according to some industry estimates, could push the total misselling bill as high as £100bn.
Claims management firms have been extremely active in touting for PPI business, often taking a large slice of any compensation they secure for customers. The National Audit Office estimated they have received as much as £5bn.
For some customers, the deadline represents a second opportunity to receive compensation: 1.2 million customers previously rejected are being told they may have other grounds for complaint. This is because of a crucial court ruling in 2014– named after the Paragon customer Susan Plevin – that means customers can make claims for the commission they paid when the PPI was sold.
The FCA has said compensation can be paid if the commission was 50% of the cost of the PPI. According to Moneysavingexpert.com more people could receive payments as commission was typically 67% of the value of the policy.
Dominic Lindley, policy director at New City Agenda, warns that the deadline to make a claim will be earlier than April 2019 for 5.5 million individuals already contacted by their bank.