Lloyds to pay £3.2bn for mis-selling PPI policies

Watch: Richard Lloyd, director of Which?, says banks should 'admit defeat'

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Lloyds Banking Group has set aside £3.2bn to pay compensation to customers who were mis-sold payment protection insurance (PPI).

The bank is inviting past purchasers of PPI to get in contact and lodge a claim for compensation if they think they were mis-sold the policies.

PPI policies are supposed to cover loan repayments if someone falls ill, has an accident or loses their job.

The huge bill has pushed Lloyds into the red to the tune of £3.47bn.

Legal ruling

Lloyds' decision will put huge pressure on other lenders to follow suit.

The bank made it clear that its move followed the recent High Court defeat for the British Bankers' Association (BBA).

The BBA had challenged new rules imposed by the Financial Services Authority (FSA) for selling PPI and which, importantly, require banks and other lenders to review all past sales of the insurance.

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This [PPI provision] will be welcomed by thousands of Lloyds customers, although it will be very expensive for Lloyds ”

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Lloyds said: "Since publication of the judgment, the group has been in discussions with the FSA with a view to seeking clarity around the detailed implementation of the policy statement.

"As a result, and given the initial analysis that the group has conducted of compliance with applicable sales standards which is continuing, the group has concluded that there are certain circumstances where customer contact and/or redress will be appropriate."

'Great news'

Lloyds is asking its customers to get in contact if they have a complaint.

But if it becomes apparent that a group of customers has been affected by a "systemic failure" then the bank will write to all of them, regardless of whether or not they have made a complaint.

Lloyds has published phone numbers for customers to call and told them they can also submit a complaint via the bank's website.

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Paul Clarke

My wife was told she couldn't claim on the payment protection insurance because I was working and money was still coming in”

End Quote Paul Clarke

"We invite customers to contact us and we will look into it," said a bank spokeswoman.

Those whose recent claims have been put on hold pending the outcome of the recent High Court case will be processed without any further prompting, she said.

The consumers association Which?, one of many consumer bodies that have campaigned against PPI mis-selling during the past few years, said Lloyds' decision was "great news".

"The rest of the UK's banks must now follow suit and draw a line under the great PPI mis-selling scandal by withdrawing their legal challenge of the FSA and proactively reimbursing the millions of customers who were mis-sold PPI," said Which? executive director, Richard Lloyd.

Several Lloyds customers contacted the BBC about their experience of buying the loan insurance.

Paul Clarke from Crewe said his wife had taken out PPI alongside a £5,000 loan.

"But when she lost her job, they refused to pay out because I was still working, even though the loan was in her name," he said.

Simon Casey from Bournemouth said he hoped his existing complaint would now be dealt with.

"My claim was put on hold whilst this decision is going to be taken to appeal," he said.

"Hopefully this means the appeal has been dropped and that claims are now going to be processed."

Huge bill

Analysis

Lloyds' decision on PPI could hardly be more dramatic, or more expensive for the bank.

It has thrown in the towel after years in which the banking industry has denied there was much of a problem.

Banks have fobbed off hundreds of thousands of complaining customers.

Of course, not all PPI policies were mis-sold and some have paid out.

But millions were sold, by credit card and hire purchase providers as well as banks.

The FSA's initial estimate of an industry-wide bill for mis-selling of a bit over £3bn is now looking like a wild underestimate.

The chances must be that the rest of the banks will finally do as they have been told by the regulators.

The Lloyds chief executive Antonio Horta-Osorio, who took over at the beginning of March, said he was now abandoning the BBA's legal challenge.

"We will no longer be participating in the BBA's judicial review," he said.

"We do not want to continue a long-standing debate of this with the regulator."

Last year, the FSA estimated that if the UK's banks contacted past customers, even those who had never complained, and about 20% responded, then this would generate a bill for the whole industry of just over £3bn, spread over the next five years.

Lloyds' figures suggest that if other banks follow its example then the bill for the whole of the UK banking industry could far outstrip these estimates.

The BBA said: "The British Bankers' Association and its members are presently carefully reviewing the judgment of 20 April and considering whether to make an application to appeal.

"This decision must be made by 10 May 2011. We will make a decision in due course," it added.

Restrictions

In 2009, the Competition Commission recommended severe restrictions on the sale of PPI policies, notably stopping lenders from selling the insurance at the point when they granted a loan.

After a legal challenge this requirement is due to be introduced in the coming year.

A ban on selling "single premium" PPI policies, which are paid for upfront in full, has already been imposed by the FSA.

The commission's report revealed the huge scale of PPI sales and their profitability.

It estimated that in 2007 there were nearly 13 million active PPI policies in force, which had mainly been sold alongside personal loans, credit cards and mortgages.

The premiums that year had generated income of £3.8bn for the 12 biggest PPI sellers.

Consumer Focus, said: "This was mis-selling on an epic scale. Every bank involved must now accept the consequences of their actions and give speedy redress to all affected customers."

Marc Gander of the Consumer Action Group warned: "Of course the real test will be when we see what mechanism they set up for repayments and the making good of their customers' losses."

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