I read the Lloyds TSB news release in respect of its 2013 half year results with great interest; yes all 159 pages! Clearly everyone at Lloyds TSB should be congratulated on the return to statutory profit. As the media are reporting, the results should enable the business to look forward to a time when the Government can decide ‘how and when’ to begin selling our £20bn stake in the business.
When reviewing such results, as an Independent Chairman of a trade association of professional financial claims management companies, my interest always focuses on how a bank is dealing with “legacy issues” in respect of previous product mis-selling. The product that currently drives media interest remains Payment Protection Insurance [PPI] mis-selling. It is also this product that dominates the workload of the Financial Ombudsman Service [FOS] and I am not surprised, therefore, that this product also dominated the “Provisions for liabilities and charges” section. That section helps our understanding of the current Lloyds TSB position in three significant ways.
Provisions for PPI claims increase again
Although the volume of PPI complaints fell in the first half of 2013 compared with the second half of 2012 an increased provision of £500m was allocated to PPI compensation claims. The new provision takes the total amount of money set aside by Lloyds TSB for PPI mis-selling to £7.3bn.
Although banks provisions are increasing, albeit painfully slowly, at around £18 billion they are still woefully short of the estimated final bill that many commentators (including The Bank of England) predict could rise to well in access £25 billion.
Margin of error for PPI complaints
The provisions section of the accounts also details the subjective assumptions upon which the provisions are based and highlight the future increases that would be needed if the assumptions are not matched by the actual experience. Frankly, the numbers are frightening. Five subjective assumptions are highlighted. Focusing on just one of these assumptions the number of customer initiated complaints received by Lloyds TSB where a PPI policy existed, is 2.3 million. If the future level of complaints was just 0.1 million higher than that assumed in the provision the additional provision would be approximately £170 million higher!
Third party supplier failings!
Within the results it is announced that Lloyds TSB has been referred to the Enforcement Team of the Financial Conduct Authority [FCA] for investigation over its governance of a third party supplier and failings in the PPI complaint handling process. The rules relating to outsourcing functions to third parties are covered in the FCA and Prudential Regulatory Authority [PRA] systems and controls sourcebooks. It is axiomatic that where a regulated firm engages a third party supplier to perform a process, a service or an activity on behalf of the regulated firm the regulated firm remains responsible for the outsourced functions and the outsourcing must not result in the delegation by senior personnel of their responsibility. The regulatory key to successful outsourcing is a robust fit for purpose third party oversight programme. The results of the Lloyds TSB referral will be awaited by many businesses that outsource processes to third parties and will clarify what is required in respect of third party supplier failings.