Of Special Interest

10th May 2011

UK banks agree to settle PPI claims

The British Bankers Association, speaking for the leading UK retail banks, announced that it would not appeal the court decision regarding the banks' liability in many claims by customers who believe they were mis-sold Payment Protection Insurance.

The BBA repeated its belief the regulations involved a retrospective change in the law and was therefore an "important principle which we will be taking forward in other ways with the authorities".

Legal advice was that the banks were unlikely to win an appeal and perhaps more importantly the view has grown that even should the banks win, the cost in terms of bad PR and the likelihood of even tougher regulation to follow was likely to be higher than the cost of settling. Lloyds Banking withdrew its support for an appeal and reserved £3.2bn for settlements last week. Barclays withdrew from the case over the weekend and in contrast to Lloyds gave a direct apology to customers. Bob Diamond, Barclays Chief Executive said:
"We don’t always get things right for our customers; when we get them wrong, we apologise and put them right. That's our commitment to our customers, and it applies to the way in which we will deal with PPI complaints."

Estimates and off-the-record indications from other banks indicate the total compensation payout by the banks could be close to £8bn (€9.1bn $13.1bn ¥1,054bn Y85.2bn). Barclays is to reserve £1bn and Royal Bank of Scotland is expected to reserve a similar amount during the current quarter. HSBC, the next largest UK retail bank announced a $440m reserve. Lloyds is not only the largest UK retail bank but was by far the most aggressive bank in selling PPI. Customer complaints statistics show it was also one of the poorest for settling PPI complaints.

Customer complaints soared last year as a result of PPI complaints. This coincided with banks having to publish their complaints figures and their success at dealing with the complaints to the customers' satisfaction. The rise in PPI complaints actually masked a fall in the number of complaints about banking services against most banks. Customer dissatisfaction is nothing new however, the spike in complaints arose from media and consumer bodies encouraging the customer to complain and the knowledge the Office of Fair Trading and the Competition Commission was investigating.

The matter has been the subject of campaigns by consumer groups since the 1980s. The focus has been on the selling of PPI to people who were not able to claim such as redundancy cover to the self employed or sickness cover which excluded pre-existing conditions. The limited length of time loan payments would be paid by the insurer was often not explained well either with many customers believing the payments would be made indefinitely when in practice it was often for three or six months only per claim.

On balance, it should be remembered that PPI insurance has helped consumers meet loan commitments for short periods of time when unemployed or ill. The serious bad press for PPI plus the banning of the sale of PPI at the time of loan agreement will mean far fewer will have this cover in future leading to an adverse effect on loan impairment and more distressed customers. Banks and loan companies have gained a significant profit from the commissions on PPI sale and the effect of the rule changes has been to increase the interest margins that lenders are now seeking on new business. Thus adversely affecting those who never required or opted for PPI insurance.