Lloyds in red after reserving £3.2bn for PPI compensation

Lloyds’ shares have taken a hit after the bank announced it is setting aside £3.2 billion to compensate customers who were overcharged on insurance policies.

The part-nationalised high street giant fell into the red after putting aside the money following a High Court decision that new rules on the mis-selling of payment protection insurance (PPI) could be applied retrospectively.

The sum, which will be used to recompense millions of consumers, is double what analysts were expecting. The news prompted shares to fall 8.7 per cent to 53p in mid-morning trade, making Lloyds the worst-performer in the FTSE 100 index.

The lender – 41 per cent owned by the taxpayer – is thought to be exposed to about a third of the 12 million outstanding PPI policies.

Lloyds said there were “certain circumstances where customer contact and/or redress will be appropriate”, but did not go into detail on the size of possible payouts.

The Financial Services Authority has for years been probing mis-selling of PPI, which usually insures purchases paid for by loan or credit card instalments against the buyer becoming sick or unemployed.

Last month, the British Bankers’ Association lost an appeal against the watchdog over new rules that came into force in December. The association is considering a new legal challenge but Lloyds said it would not take part in any fresh action as it wanted to draw a line under the episode.

Chief executive Antonio Horta-Osorio said: “We do not want to continue a long-standing debate of this with the regulator.”

Lloyds is thought to be the most exposed UK bank but the High Court decision will affect other banks and some overseas firms.

Up to now the biggest sum set aside to cover possible compensation claims was the $592 million reserve announced by Bank of America.

We do not want to continue a long-standing debate of this with the regulator. Antonio Horta-Osorio

RBS, which is due to post its report on Friday, may be affected. RBS shares were down by 4 per cent while Barclays fell 1 per cent in early trading on Thursday.

PPI is not the only issue of concern to Lloyds investors. Stripping out the PPI provision, the bank made a £284 million pre-tax profit in the first quarter, compared to £1.1 billion the previous year.

Losses from bad loans at Lloyds rose to £2.6 billion in the first quarter, up from £2.4 billion a year ago but down from 3.8 billion in the previous quarter.

Lloyds said the first quarter hit was £500 million more than it expected, mainly due to the Irish debt crisis. The double blow pushed Lloyds into a statutory loss of £3.5 billion in the first quarter, down from a £721 million profit a year.

Lloyds has rejected a call from the FSA to contact everyone who has bought PPI from the bank in the past, but it has published phone numbers on its website for customers to call if they want to make a complaint.

Poor product
James Daley, Money Editor of Which? Money, said he hoped the other big banks would follow Lloyds' lead in abandoning the legal fight with the FSA.

He told Channel 4 News: "At the heart of it is the fact that PPI was just a very poor product. In the most extreme cases, people ended up spending tens of thousands of pounds on insurance they didn't need or could never have claimed on.

"In one of the most extreme examples, there was a £90,000 loan and the cost of the PPI ended up at £25,000, plus interest. That was the killer in a lot of cases. The loan might be for ten years and the PPI would only cover you for the first five years, but you were continuing to pay interest for the whole period.

"You couldn't claim on PPI policies if you were off work due to stress or back pain, which are the two most common reasons for being off work.

"It got sold to students, who could never have claimed on it. It got sold to self-employed people - who could never have claimed on it. And it was over-priced in many cases."

He added: "The new chief executive of Lloyds has only just come in. He has obviously taken a fresh look at it and I'm sure it was perfectly apparent to him that it was unlikely that the banks were going to wriggle out of it. But the other banks haven't yet given the same assurances that Lloyds have."