The Sunday Times Published: 9 August 2015
Big lenders warn of potential multi-billion pound compensation claims in new payment protection insurance scandal
Landmark ruling on secret PPI commission exposes the big banks to more mis-selling losses.
BANKS are bracing for a new wave of multibillion-pound payouts over secret commissions linked to payment protection insurance (PPI).
Britain’s top four lenders — HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group — have been quietly warning in recent weeks that they could be facing a financial hit from a landmark legal ruling late last year.
The warnings raise the prospect of a new and costly financial scandal, with lenders having already paid out tens of billions of pounds in fines and compensation over a variety of transgressions, including PPI mis-selling and manipulating the Libor interest rate benchmark.
The latest potential pitfall involves a case brought by Susan Plevin, a widowed college lecturer, over a loan and PPI policy she took out in 2006. At the time, she was not made aware that more than 70% of the commission she paid on the insurance contract ended up in the hands of her lender — Paragon Personal Finance — and a broker.
The Supreme Court ruled last November that the large commission was in breach of the Consumer Credit Act, as it had not been disclosed to Plevin.
The Financial Conduct Authority (FCA) is due to rule on how widely banks should apply the Plevin ruling by the end of the summer.
However, banks fear that the City watchdog’s review could unleash a fresh wave of claims from customers who bought PPI policies.
That could lead to billions of pounds in payments, dashing hopes that banks can soon draw a line under the costliest mis-selling scandal in history.
One senior official at a British bank said there are fears the FCA will go for the “nuclear option” of applying the ruling to any financial product where commission levels were not disclosed. Another warned that “once you open the door for this, it could be apocalyptic”.
However, the senior official said it was “hard to imagine the British regulator being willing to go that far”.
A recent study from Autonomous Research, chaired by former City minister Lord Myners, warned that banks could face a bill of £33bn if the judgment were applied across the entire financial industry.
“In essence, this ruling appears to open up a new angle for PPI mis-selling claims, based on commission payment,” Autonomous said. “If applied to other products [for example, store cards and car finance], this case could lead to a whole new wave of consumer claims for the banks, with a bill that could be even higher than the PPI tally.”
The unprecedented compensation bill would dwarf the near £30bn that has already been paid out on PPI policies since the crisis.
“Banks are circling, trying to figure out what happens next,” said a senior executive at one of the big four. “The Supreme Court can’t be challenged, so this could mean billions for each of the banks.”
Another senior official at a British bank said any lender that is not monitoring this situation closely would be “irresponsible”.
The FCA is combing through the evidence to assess whether the current approach to PPI is “meeting its objectives of securing appropriate protection for consumers and enhancing the integrity of the UK’s financial system”.
The watchdog’s review of the Plevin ruling is expected to coincide with a decision on whether to introduce a cut-off date for PPI mis-selling claims. Bank profits, balance sheets and reputations have been shattered by a cascade of fines for misconduct before, during and after the financial crisis.
PPI policies were created to help borrowers make loan repayments if they became ill or lost their job. However, banks enjoyed large profit margins on the policies, which encouraged them to sell PPI aggressively to customers who did not want or need them.
The fear is that the FCA will introduce measures that could mean that even if insurance was fairly sold, a lender could be on the hook for mis-selling compensation if a PPI policy was sold through a broker.
Despite hopes that the PPI scandal could come to a swift end, claims management firms are continuing to contact customers urging them to lodge complaints. Lloyds Banking Group has been worst affected by the scandal and has so far used £13.4bn of its compensation pot.
The taxpayer-backed bank was forced to set aside £1.4bn in provisions for PPI claims and was also slapped with a record fine of £117m for failing to compensate victims affected by the PPI scandal.
All of the banks declined to comment beyond the warnings disclosed in their recent financial results.