British banks set aside £10 billion to compensate clients who were ‘mis-sold’ insurance policies
British banks have ramped up the amount of cash they are setting aside to compensate clients who were mis-sold insurance policies to more than £10 billion, significantly slashing their profits in the process.
The latest earnings season for major banks wrapped up on Monday, with HSBC announcing it was hiking provisions to compensate customers in Britain who were mis-sold payment protection insurance (PPI) by $353 million (276 million euros).
That brought its provision to $2.1 billion, about a fifth of the £10 billion ($16 billion, 12.5 billion euros) total set aside by Britain’s banks, which have also been rocked by humbling state bailouts, money-laundering and the Libor rate-rigging scandal.
PPI is “turning out to be the most economically damaging crisis, there’s no question about that but what is probably the most surprising of all is that the banks themselves have been completely unable to determine how much they have to pay”, independent banking analyst Ralph Silva told AFP.
JP Morgan Cazenove estimates that the total bill could hit £15 billion, while the Financial Services Authority regulator said that customers have together so far received compensation of £6.5 billion for mis-selling going back more than a decade.
British banks last year lost a high court appeal against tighter regulation of PPI, which provides insurance for consumers should they fail to meet repayments on a credit product such as consumer loans, mortgages or payment cards.
PPI became controversial after it was revealed that many customers had been sold it without understanding that the cost was being added to their loan repayments.
British authorities subsequently banned simultaneous sales of PPI and credit products.
“It’s extraordinary that we’ve received our 500,000th complaint about PPI — and despite these record numbers, this mis-selling scandal shows no sign of slowing,” said Natalie Ceeney, chief executive at the Financial Ombudsman Service watchdog.
The additional provision announced on Monday by HSBC contributed to the bank’s net profits tumbling by more than half to $2.5 billion in the third quarter compared with a year earlier.
HSBC was also hurt by an increase in the amount set aside for fines linked to money-laundering in the United States, to $1.5 billion, and owing to large fluctuations in the value of its own debt.
Rival Barclays and state-rescued lenders Royal Bank of Scotland and Lloyds Banking Group last week each announced hikes to their PPI provisions.
Barclays, which recently suffered a boardroom shake-up amid the Libor interest rate-rigging scandal, said it had set aside another £700 million to compensate PPI customers.
Royal Bank of Scotland, which is 81-percent owned by the government after a huge bailout amid the global financial crisis, booked another £400 million hit. Lloyds Banking Group said its new provision would take its total bill for the insurance mis-selling to a staggering £5.3 billion.
“The banks have been in denial about the true scale of this scandal,” said Peter Vicary-Smith, chief executive of consumer watchdog Which?
“Their piecemeal approach to topping up provisions is an inadequate response to what is now the biggest financial mis-selling scandal of all time”.