U.K. Banks Pay $66 Billion as Costliest Ever Scandal Winds Down
U.K. Banks Pay $66 Billion as Costliest Ever Scandal Winds Down
(Bloomberg) -- It was only supposed to be a few billion pounds.
Almost three decades after the first legal claim, British banks are ready to turn the page on the costliest scandal in U.K. financial history. Shareholders are still paying the price: Lloyds Banking Group Plc is curbing its buyback, and Barclays Plc may have to follow suit.
The payment protection insurance debacle has resulted in 53.3 billion pounds ($66 billion) of provisions, with HSBC Holdings Plc the only major bank yet to give a third-quarter update. PPI’s cost dwarfs even the Libor and foreign-exchange rigging scandals. The 45 million policies were intended to cover missed debt repayments, and were often sold using aggressive tactics.
After almost a decade-long process that saw claims companies cold-call ordinary Britons to ask about PPI-linked mortgages and credit cards they may have long forgotten, and a memorable ad campaign featuring Arnold Schwarzenegger’s disembodied head urging potential claimants to “do it now,” the average payout per customer is about 1,700 pounds, according to the Financial Conduct Authority.
“Someone within the banks must have known that not only was the product expensive, it was so ridiculously expensive that even if a customer made a full claim, it would barely cover the cost of the insurance,” said Dominic Lindley, policy director at New City Agenda, a London-based financial services think tank.
In one example, a PPI policy sold with a mortgage cost 20,838 pounds over the term of the loan, and the maximum a customer could claim over that time frame was a total of 31,000 pounds. The commission paid by the bank to its staff for the sale was 87% of the premium. As the profits were so large, firms were prepared to risk a fine for mis-selling, according to the Financial Services Authority, the forerunner to the current regulator.
The first PPI legal case dates to the early 1990s. Concern about the product swirled around the personal-finance press, and then Britain’s broadsheet newspapers. The banks organized themselves for a legal fight, but in 2011, a court ruled they may have to pay compensation.
That’s when Lloyds Chief Executive Officer Antonio Horta-Osorio broke with his peers -- and opened the floodgates. He set aside billions, saying “these problems have to be closed. We are drawing a line under PPI.” The British Bankers Association subsequently dropped its appeal of the court ruling.
In May of 2011, Deutsche Bank AG analysts estimated British banks may have to set aside about 8 billion pounds for the scandal. But claims kept trickling in.
Banks repeatedly took unexpected hits to their quarterly earnings, and executives repeatedly reassured shareholders that the end of the pain was in sight. Even after that, the scale of the final rush took the lenders by surprise. There is still the possibility that the banks will pay more claims in individual PPI cases that go to court, but the Aug. 29 deadline ended the FCA-overseen formal claims process.
The PPI bill is 10 times more costly than the next-most-expensive U.K. retail banking scandal, the mis-selling of interest rate hedging products, which has cost lenders about 4.9 billion pounds. The Libor and foreign exchange-rigging scandals have each cost global banks about $10 billion in fines, though that sum excludes a myriad of legal claims.
Lloyds Banking Group
Total compensation: 21.8 billion pounds
The U.K.’s biggest mortgage lender took charges more than double that of the next biggest seller of PPI. In 2011, Horta-Osorio, then only months into his tenure, set aside a 3.2 billion pound provision. At the time, it was seen as overly pessimistic. “It’s refreshing to see a bank break ranks from its peers and do the right thing,” the consumer group Which? said then.
Barclays
Total compensation: 11.2 billion pounds
It was not the biggest seller of PPI policies, but Barclays was one of the first to offer them. Back in 2011, it set aside 1 billion pounds and said it expected that sum to cover the cost of future redress and administration.
Royal Bank of Scotland Group Plc
Total compensation: 6.2 billion pounds
Although PPI was a relative sideshow to RBS’s 2008 taxpayer bailout -- the biggest in history -- and various fines for misconduct, the scandal has still been an immensely costly episode. Former CEO Stephen Hester said in a 2012 speech that British banks needed a “new compact” with society, calling the PPI affair one of the “last vestiges” of the pre-crisis era.
HSBC
Total compensation: 3.8 billion pounds
HBSC makes most of its money in Asia, but has a large British operation that was once known as Midland Bank. Relative to its size, its provisions have been modest. It has yet to provide an update on further PPI claims made before the deadline.
CYBG Plc
Total compensation: 3.1 billion pounds
CYBG, much smaller than the other banks, is best known for owning the Virgin Money brand. That small market value relative to the amount of new PPI claims meant it suffered the most violent share-price reaction to the latest rush, plunging more than 20% on the day. It said it received “unprecedented volumes of information requests” before the deadline, boosting its provisions by as much as 450 million pounds.
To contact the reporters on this story: Harry Wilson in London at hwilson57@bloomberg.net;Viren Vaghela in London at vvaghela1@bloomberg.net
To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Keith Campbell, James Hertling
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