U.K. Banks Seen Facing $2 Billion in Extra PPI Costs After Delay

  • U.K. bank regulator wants ‘orderly conclusion’ to PPI scandal
  • Deadline could be later than expected, cause more losses

Three of the U.K.’s biggest banks face extra charges of about 1.5 billion pounds ($2 billion) after the Financial Conduct Authority said it will probably delay a deadline on payment protection insurance complaints by a year, according to Citigroup Inc.

Lloyds Banking Group Plc may have to set aside an additional 750 million pounds to cover the cost of compensating consumers who were mis-sold PPI through June 2019, analysts led by Andrew Coombs wrote in a note to clients on Tuesday. Royal Bank of Scotland Group Plc may require 500 million pounds while Barclays Plc could need 250 million pounds.

The FCA raised the prospect of additional charges for U.K. banks, in a scandal that has so far cost them about $41.8 billion, when it said it would consider a mid-2019 time limit for PPI claims in an e-mailed statement earlier on Tuesday. The regulator had previously said in October it was considering a deadline in 2018 in order to bring an “orderly conclusion” to what has become the nation’s costliest banking scandal.

The U.K.’s biggest banks have seen earnings damaged by rising costs to compensate customers sold loan insurance they didn’t want or need, far outstripping charges tied to currency rigging and the manipulation of Libor. State-backed Lloyds has set aside about 16 billion pounds to provide redress, more than any other lender, and was fined 117 million pounds by the FCA last year for the way it dealt with some complaints.

“Putting a deadline on PPI complaints will bring the issue to an orderly conclusion in a way that protects both consumers and market integrity,” FCA Chief Executive Officer Andrew Bailey said Tuesday in the statement.

The FCA will extend its consultation period into proposed rules relating to the way banks handle PPI complaints until later this year. The regulator said it needs more time to consider the impact of a court ruling known as the Plevin case, which threatened to spark billions of pounds in fresh charges for U.K. banks. It may then start the two-year time limit for consumers to make fresh complaints in June.

“We are disappointed that the two-year deadline suggested by the regulator won’t commence until June 2017,” a spokesman for Lloyds said in an e-mailed statement. The bank fell 1.2 percent to 52.59 pence at 2:38 p.m. in London trading amid a widespread slump in European bank shares.

The lender said it has about 2 billion pounds of unused provisions on its balance sheet and didn’t need to alter its guidance for future charges at this stage. The bank said complaints have dropped to 7,500 a week in the past six weeks from an average of 8,500 in the first half of 2016. It received 6,700 complaints about PPI last week, its lowest level since 2011, Lloyds said.

Barclays, RBS and Lloyds took about 4 billion pounds in provisions for PPI in fourth-quarter earnings with the expectation that would see them through to the end of a time limit on complaints in mid 2018. Other lenders including Banco Santander SA’s British unit and National Australia Bank Ltd.’s former U.K. business CYBG Plc took similar steps. 

“Further provisions are highly probable, especially at Lloyds,” wrote the Citigroup analysts, who have a sell rating on the shares. Any extra charges have the potential to exacerbate a slump in capital generation at Britain’s largest mortgage lender and means the end of the PPI scandal is “going to be more drawn out than first anticipated.”

More Provisions

Barclays last week took another 400 million-pound provision to compensate customers for the wrongly sold insurance products, bringing the London-based lender’s total to 7.8 billion pounds. Lloyds didn’t take a provision when it reported results Thursday, while HSBC Holdings Plc and RBS are set to report earnings this week.

The FCA moved to consider a time limit amid a proliferation of complaints routed via claims management companies that charge fees for their services, as well as a rising number relating to older sales, some from as far back as the last century. The U.K.’s Financial Ombudsman Service said in May it was “still receiving” up to 4,000 cases each week relating to PPI, accounting for around half of all complaints about financial products in Britain.

A mid-2019 deadline would be “later than anticipated” and could trigger more legal costs at U.K. banks, Shore Capital analyst Gary Greenwood wrote in a note to clients Tuesday.

“It’s possible that an extra year’s worth of provisioning may now be required,” Greenwood wrote. “We wouldn’t be surprised to see top-ups of a few hundred million pounds (and perhaps as high as 1 billion pounds) for each of the large U.K. banks, with Lloyds being the worst affected.”

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