At more than £50bn, the financial impact now dwarfs all other British banking scandals in scale.
It rivals the penalties and profit destruction that hit the largest US banks after the 2008 financial crisis.
Barclays and Lloyds on Monday became the latest lenders to admit that the cost of compensating customers for mis-sold payment protection insurance was much worse than anticipated.
“We’re not counting the complaints any more,” said a banker at one high-street lender. “We’re weighing them.”
PPI was supposed to be a simple insurance product that allowed borrowers to maintain loan repayments if they lost their jobs or fell ill.
Faced with rising competition and falling profit margins in the early 2000s, however, British banks pushed staff to aggressively sell the product, regardless of whether customers were eligible to claim or even knew they were paying for the insurance.
Banks resisted criticism about the product for almost two decades, but were finally ordered to begin compensating customers after a High Court battle in 2011. The industry was preparing to appeal when Lloyds broke ranks and agreed to start compensating customers in an attempt to draw a line under the scandal.
That has proven easier said than done.
Eight years ago, it was thought that the scandal could cost the sector up to £4.5bn — a terrifying prospect at a time when the industry was still recovering from the financial crisis.
The claims soon blasted through that estimate and there was a steady stream of compensation demands. As it became extremely difficult to prove who was actually mis-sold, almost anyone who received PPI in any form started to get compensation.
Vast reserves were accumulated to deal with the claims. But banks were again caught off-guard last month. As the August 29 deadline for claims approached, there was a sudden rush.
Some said that documents had arrived by the vanload in the final days before the cut-off, while one lender’s Scottish processing centre had started operating 24 hours a day to try to make its way through the backlog of inquiries.
By the time Lloyds updated the market with an extra provision of £1.2bn-£1.8bn on Monday, the total had passed £50bn. Barclays announced in the evening that it would have to absorb an extra £1.2bn-£1.6bn.
Lloyds, Barclays, Royal Bank of Scotland, CYBG and the Co-operative Bank have all warned that they will have to set aside extra money since being surprised by the extent of August’s surge.
Lloyds said on Monday that it would be able to maintain its progressive ordinary dividend policy, but it suspended the remainder of its annual share buyback programme. Royal Bank of Scotland said that extra provisions would wipe out about a third of its annual profit, while analysts warned that CYBG’s dividend would be lower than expected after its latest provision wiped out most of its excess capital.
Ian Gordon, analyst at Investec, said: “Most people expected some further top-ups because I’d agree the banks’ provisioning looked optimistic at Q2. It didn’t look recklessly low [at the time], whereas it seems it was.”
Monday’s update had a limited impact on Lloyds’ share price, but Mr Gordon said the performance was flattered by positive economic data and signs of progress in Brexit talks that lifted bond yields and boosted bank stocks across the board.
Over a longer time period, however, the impact of the scandal is more apparent. Lloyds has transformed since António Horta-Osório, chief executive, said he wanted to “take a provision now and move on” in May 2011, returning to profitability and private ownership after its bailout during the crisis. Its share price, however, has not improved since, and, in fact, has slipped 5 per cent while the wider FTSE 100 gained 23 per cent.
So large is the penalty that PPI has become one of the most serious mis-selling scandals globally. The £52bn-£53bn set aside to deal with PPI is more than US banks paid for unfairly foreclosing on homes during the financial crisis, and second in cost only to the mis-selling of residential mortgage-backed securities.
It is also big enough to have provided a possible boost to the economy, propping up consumer finances by providing handouts worth thousands of pounds to millions of customers at a time when the UK was in danger of falling into recession.
The last-minute surge, however, is unlikely to have had as big an impact, as a higher proportion of the provisions being set aside by banks is being spent on administration costs rather than handed out in compensation. Banks had already reported a sharp increase in inquiry volumes between January and June, but data from the Financial Conduct Authority show that there was no corresponding increase in compensation payouts.
Several banks have complained that much of the late surge in costs has been driven by professional claims management companies and law firms which have submitted large volumes of low-quality inquiries, the vast majority of which never lead to a formal complaint and compensation.
John McFarlane, the former chairman of Barclays, told the Financial Times recently: “The percentage of spurious claims by claims management companies was very significant.”
Claims specialists, however, were unsympathetic. Negar Yazdani, partner at Blacklion Law, said: “It is lamentable that they are still refusing to take responsibility for the mess that they themselves created. My view of the deadline is that it is outrageous, completely arbitrary and contrary to consumers’ best interests. It was imposed by the FCA to protect the banks’ balance sheets.”