More than £50bn – that’s what the PPI scandal has cost Britain’s banks. How much more will become clearer this week when Lloyds, the biggest seller of the dud product, winds up the banks’ trading statement season on Thursday.
PPI – short for payment protection insurance – is the biggest rip-off in British banking history. The bill so far for repaying customers and handling claims is as much as £53.3bn – more than five times the cost of the London Olympics – according to the New City Agenda thinktank.
Banks sold PPI from the mid-90s until 2012, promising to cover customers’ loan repayments if they became ill or unemployed. The policies were often worthless, because they failed to pay out or weren’t needed in the first place.
The product was highly profitable and was given the hard sell. Staff selling loans were rewarded for flogging PPI and were under pressure to meet targets.
The deadline for claims was 29 August, leading to a surge in cases that took many banks by surprise. Last week Royal Bank of Scotland set aside £900m for PPI – at the top of its estimates – sending it to a quarterly loss. Barclays set aside £1.4bn – in the middle of its guidance.
Tomorrow we’ll hear from HSBC, followed by Santander on Wednesday and Lloyds on Thursday. Lloyds’ PPI provision is almost £22bn. After the PPI deadline, the bank said it expected to set aside between £1.2bn and £1.8bn for the third quarter.
Ultimately, the banks have lost money on PPI. The industry received £44bn of premiums and made profits of at least £21bn. Even after adding interest charged, profits are dwarfed by the cost of putting things right.
Could it happen again? Personal finance will always be fertile ground for companies peddling murky products. Cases such as the RBS’s treatment of small-business customers and the banks’ reluctant handling of PPI cast doubt on lenders’ claims to have cleaned up their act.
The incentives for bank bosses haven’t changed much either. Lloyds clawed back some bonuses from former chief executive Eric Daniels but Daniels was not fined and continues to work in financial services. The only fine for a chief executive who oversaw PPI was £14,000 imposed on the boss of sofa store Land of Leather.
Daniels’ replacement, António Horta-Osório, was docked a mere £234,000 from his bonus in 2015 after Lloyds – which, like RBS, was partly owned by taxpayers – was fined a record £117m for not treating PPI claimants fairly. His total pay that year was £8.5m.
Dominic Lindley, New City Agenda’s director of policy, said: “Overall the banks have suffered a loss but that has fallen on the current crop of shareholders and, with Lloyds and RBS, taxpayers. Bank executives, whose bonuses were linked to PPI profits, haven’t given anything back or been fined. You would like to think nothing as big will happen again but there will continue to be scandals.”
The surge in claims was helped by the Financial Conduct Authority’s ad campaign fronted by an animatronic Arnold Schwarzenegger, but that came after the damage had been done. Now the FCA faces criticism for acting too slowly on the collapse of Neil Woodford’s investment business and London Capital & Finance.
The scandal also spawned a mini-industry of claims-handling firms and forced the banks to hire thousands to process customer inquiries. These job creation schemes and the billions put into consumers’ pockets may have supported the economy in rocky times. But there are few glimmers of light in this squalid affair.
