26 July 2012 Last updated at 10:48 ET

Article written by Robert Peston Business editor

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Lloyds shows cost of alienating customers

 

There has been progress at semi-nationalised Lloyds.

Loans are going bad at a slower rate, and are not expected by Lloyds to deteriorate any time soon - which is another one of those benign trends that makes the current UK recession seem slightly odd.

The bank has further reduced its dependence on unreliable wholesale funding.

And although there has been a further fall in the profitability of lending, the so-called margin, that is now expected to stabilise before recovering early next year.

As for when the bank might resume paying a dividend and when the Treasury might start thinking about privatising some of taxpayers' 40% stake, that can all be evaluated in the autumn, after the shape of Europe's new banking rules are clearer (in what's known as CRD4).

Those positive developments have largely been drowned out however by Lloyds' disclosure that it is making a further £700m of provisions to cover the costs of paying compensation to those who were missold PPI credit insurance.

Those additional PPI costs meant Lloyds remained in loss, for the first six months of the year, to the tune of £439m. And they bring to a gargantuan £4.275bn Lloyds' aggregate provisions for recompensing customers who were wrongly sold this loan insurance.

What is perhaps horrifying in these huge numbers is how much time and money Lloyds is deploying on processing bogus claims.

The chief executive Antonio Horta-Osorio told me that Lloyds is employing 6000 people full time on processing claims for PPI compensation, of which 1000 spend all their time dealing with false claims.

Lloyds blames unscrupulous claims management companies (CMCs) for a sharp increase in fictitious claims. It says half of all requests for compensation come from CMCs, and adds that 50% of CMC claims are bogus.

If like me you are someone who never bought PPI insurance and yet receive daily calls and texts from CMCs claiming they have "information" that you are entitled to compensation, you may not be wholly surprised by Lloyds' claim that hundreds of thousands of people apply for compensation without any proper justification.

Mr Horta-Osorio complains that the system incentivises the bank to give money even to those with no decent argument for it, because the moment any case is forwarded to the ombudsman Lloyds incurs an automatic bill of £800.

Understandably Lloyds feels hard done by - and would like the Ministry of Justice, which authorises CMCs, to do something about the cowboys.

There is however a thoroughly painful and depressing lesson for the banks in all this.

All that mis-selling and all that reckless lending in the boom years that hobbled the economy seems to have so undermined the trust and respect of banks' customers that few seem to think twice before putting in a flimsy demand for compensation.

An epidemic of mis-selling may have spawned an epidemic of mis-claiming.