August 29, 2017 / 12:03 PM / a month ago

Breakingviews - British banks edge closer to painful PPI clarity

The FCA's TV ad campaign features an animatronic Arnold Schwarzenegger

LONDON (Reuters Breakingviews) - British banks argue that a deadline for consumers to claim for mis-sold loan insurance policies is a good thing. In narrow financial terms, that’s not quite true. The country’s financial watchdog has set an ultimatum of August 2019, backed by a TV ad campaign funded by the banks themselves. That is likely to provoke a rush of new claims which could make existing provisions look insufficient – and may not be the end of the saga anyway.

The biggest UK lenders charged with mis-selling so-called Payment Protection Insurance – Lloyds, Royal Bank of Scotland, Barclays and HSBC - had set aside more than 36 billion pounds of provisions for compensation and related expenses by the end of June. Some 6.7 billion pounds of that total is still unused. The exact amount required depends on several variables, such as how many policies were mis-sold, how many people lodge a claim, how much each complainant gets and how much it costs to process.

That leaves room for error. HSBC reckons that around 39 percent of the policies it sold will invoke complaints. Lloyds has estimated more like 33 percent. If HSBC’s forecast proves more accurate, Lloyds would have to add almost 2 billion pounds to the amount it keeps in reserve. Conversely, HSBC reckons 83 percent of claims will be upheld, while RBS is planning for 91 percent. And while Barclays says that each claim will cost 283 pounds to process, Lloyds estimates 450 pounds.

Besides, the deadline may not prove final. One claims manager, We Fight Any Claim, has already lodged an objection, arguing that the Financial Conduct Authority doesn’t have the right to limit future complaints. If the timetable slips, it would in purely financial terms be better for banks. A lack of urgency would mean many claims never get made, and the time value of money means that the longer claims take to arrive, the less they are worth today.

There’s a non-financial benefit to getting the whole PPI shambles wrapped up, though. Processing millions of claims is a drain on costs, but also on staff morale. Along with the huge settlements with U.S. regulators for mis-selling mortgage-backed securities, and the sale of government stakes in banks like Lloyds and RBS, moving on from PPI is a milestone that lenders need to pass in order to plausibly argue to customers and politicians that finance is a force for good. The deadline can only help.

Breakingviews

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