3 Feb 2014

Lloyds PPI compensation tops £10bn

Lloyds Banking Group is forced to set aside a further £1.8bn to compensate customers for mis-sold insurance products, possibly delaying plans for its re-privatisation.

Lloyds Banking Group, which is 33 per cent owned by the government, has been hit with a further £1.8bn charge for mis-selling payment protection insurance (PPI) for its loans.

This brings the total amount it has set aside to compensate customers for mis-selling to £9.8bn – more than any other UK bank.

PPI was sold to millions of people by banks and other financial lenders, but the scheme was discredited when it emerged that many borrowers were ineligible to claim on them. The industry is now carrying a £20bn compensation bill.

Lloyds is the latest banking group to be hit with additional charges for mis-selling. Last month the Royal Bank of Scotland said it may be facing a loss of £8bn after being forced to set aside a total of £3.1bn to cover the cost of litigation and customer compensation claims on a different product, interest rate swaps.

The mis-selling saga

Payment protection insurance

In November 2012, the Lloyds bill for mis-sold PPI passed the £5bn mark. In February of that year, five serving and former Lloyds bankers were stripped of £1.4m in bonuses because of their role in this mis-selling.

In February 2013, Barclays said it was allocating another £1bn to compensate people wrongly sold financial products. More than half of this total – £600m – will go to those mis-sold PPI and is on top of the £2bn Barclays had already put aside. The rest of the money – £400m – is to cover mis-sold interest rate swaps to small businesses, and was in addition to the £450m previously allocated.

Interest rate swaps

In June 2012, Barclays, HSBC, Lloyds and Royal Bank of Scotland (RBS) agreed to compensate thousands of business customers after the Financial Services Authority found they mis-sold specialist insurance on loans.

Businesses were sold interest rate swap arrangements (IRSAs), which were meant to protect them against the effects of a rise in interest rates. Channel 4 News revealed in December 2012 that in some cases, hidden penalties began to kick in when rates fell.

In October 2013, we also reported that RBS had been seizing properties from customers only for a subsidiary of the bank to buy them at knock-down prices. Property developer Chris Kashourides blamed his predicament on the purchase on an IRSA.

In January, RBS was forced to set aside more money for potential litigation and compensation linked to its mis-selling of interest rate swaps, bringing its compensation pot to £3.1 billion.

The extra compensation charge may make it harder for the bank to start issuing dividends again, and in turn hamper the government’s plans to sell its 33 per cent stake in the group.

Lloyds last paid a dividend in 2008, before it was rescued by taxpayers during the financial crisis. Financial analysts had hoped the bank would be able to start issuing a dividend at the start of this year, but the bank said it expected to apply to the regulator to restart dividend payments in the second half of 2014.

Chancellor George Osborne plans to sell the government’s stake in Lloyds by the 2015 general election and wants some of its shares to be offered to the public.

Despite having to set aside more money for compensation claims, Lloyds still expects to make a small profit for 2013, and remains much closer to returning to private hands than RBS, which is expected to be three to five years away from a return to privatisation.