BRITISH BANKS have given up their fight to avoid compensating customers wrongly sold loan insurance, forcing a trio of top banks to take a combined hit of more than $3 billion in the latest blow to the industry.
Barclays and Royal Bank of Scotland (RBS) yesterday each took near £1 billion provisions for the second quarter of 2011 to cover costs related to mis-selling payment protection insurance (PPI).
HSBC said it had set aside $440 million.
British banks, already under pressure from regulators to clean up their act following the financial crisis, said they would not appeal against a ruling they should pay compensation.
The total bill is in line to top £6 billion and may end up near £8 billion, with several million Britons potentially in line for a payout. Britain’s financial ombudsman said it had, so far, received more than 200,000 complaints over PPI and that average compensation payout was £2,750.
Events have moved fast since Lloyds Banking Group was first to capitulate over the issue, unveiling a shock £3.2 billion charge last week to cover compensation, after years of legal wrangling.
“This is another negative for the banking sector. It means even more costs for the banks, which were already facing mounting costs on their capital structures,” said John Smith, fund manager at British investment firm Brown Shipley.
Banks face higher costs from plans by a government-appointed commission to make them hold more capital and form separate subsidiaries for retail and investment banking operations, an effort to better protect retail customers and shield the banks in the event of another financial crisis.
Overdraft fees also remain in the spotlight after being criticised for being opaque by business secretary Vince Cable and parliament’s treasury select committee.
The PPI payouts have parallels with a previous mis-selling scandal involving endowment mortgages, which became popular in the late 1980s and early 1990s as homebuyers took interest-only home loans backed by investment plans intended to pay off the principal.
But returns often fell short and providers were subsequently forced to pay compensation to many lenders. – (Reuters)
