Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

The acronym that should worry U.K. bankers most isn't EU. It's PPI.

Britain's biggest banks have had to set aside $44 billion over the past five years to compensate clients wrongly sold payment-protection insurance . That's the biggest share of the 54 billion pounds ($77 billion) of total misconduct costs U.K. lenders have logged since 2011, according to Berenberg research.

At Lloyds, the total bill for PPI stands at 16 billion pounds (that's more than twice the bank's profit for last year). And the company still received about 8,500 complaints a week about PPI in the first quarter.

Just as investors were betting that the worst of this scandal was over, a Parliamentary report on Friday accused regulators of not doing enough to tackle the "cultural problems" behind mis-selling.

The Public Accounts Committee cited claims of incompetent and intimidating sales teams as well as badly designed or targeted products. It wants the Financial Conduct Authority to draw up plans to improve banks' culture.

That highlights how the real long-term price of their misconduct will be tougher limits on the money they can make from cross-selling products to customers. That could put British lenders at a structural disadvantage to their European peers.

U.K. banks already lag their European counterparts when it comes to generating revenue outside the traditional lending business. Look at net fee and commission income as a percentage of total assets. In Britain it fell to 0.54 percent from 0.55 percent between 2012 and 2014, according to the European Central Bank. In Italy and Spain, the figure increased, while in France the pace of decline was slower than in Britain.

Lagging Europe
British banks' net fee and commission income as a percentage of total assets by country
Source: ECB data

Signs are this is exactly the kind of gap that comes from a culture change. Executives are telling investors that the days of cross-selling are over and that staff are being judged on customer service, not sales commissions. Adjusted total non-interest income for Lloyds, RBS and Barclays fell by almost a third between 2013 and 2015, according to Bloomberg data.

Lend, Don't Sell
Total interest income at Lloyds, RBS and Barclays is eclipsing income from fees, commissions and trading
Source: Bloomberg
Based on adjusted revenue

While this might be deemed a good thing by U.K. politicians, it doesn't bode well for revenue. It gives banks fewer levers to pull to offset the pain caused by rock-bottom interest rates and a squeeze on lending margins. So far, U.K. banks have been able to rely on a boom in house prices and an economic recovery that have kept the mortgage market running at full speed. When that growth peters out, what's left? Cost cuts or aggressive lending.

Parliament is right to keep banging the drum on bank culture. But the recommendations seem likely to make the industry even less inclined to offer products to its customers beyond plain-vanilla loans. That could create more risks, not fewer. And considering Her Majesty's Government is still a substantial shareholder in two top British lenders, a more constructive approach would be good for the taxpayer too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Lenders often pushed borrowers to take out insurance covering the repayments on their loans, credit cards and other borrowings. Many customers found they didn't need the protection -- or that the policies they paid for didn't even cover them.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net