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What is the true cost of PPI claims?

Financial claim watchers were eagerly awaiting the quarter 3 interim results of Lloyds Banking Group [LBG] to see if Payment Protection Insurance [PPI] claims had turned a corner. As it happens the results give some mixed messages. Looking for positives, it is noted that monthly complaint volumes were on average 55 per cent below those in the third quarter of 2012. But it seems that PPI will continue to influence LBG performance and dominate its quarterly announcements for some time to come – why?

PPI complaint volumes

Firstly, the PPI complaint volumes are still running at 11,000 per week. This might be 8% down in the quarter, but that is still an annualised rate of over half a million a year! It is highly likely that the increased scope of proactive mailings combined with higher response rates will see numbers continue at this level for some time to come.

Levels of PPI complaints burden and cost

Secondly, such a level of complaints results in a massive administrative burden and cost. This set of results announced a further increase, £161 million in respect of administration costs meaning that around £1.7bn of the amount set aside by LBG for PPI compensation relates to administration costs.

Provision for PPI redress continues to rise

Thirdly, the provisions continue to rise. LBG has increased its forward projections and raised its PPI provision by another £750 million bringing the total amount provided for PPI mis-selling to over £8bn. This increase has been driven primarily by higher than expected reactive and proactive volumes, the increased scope of remediation, higher than projected uphold rates and associated operational costs. In addition to this, LBG flag up a further warning as part of its results stating, “The total amount provided for PPI represents our best estimate of likely costs and a number of risks and uncertainties remain, in particular complaint volumes, uphold rates, average redress costs and the outcome of the FCA [Financial Conduct Authority] Enforcement Team investigation. The cost of these factors could differ materially from our estimates, which could result in a further provision being required.”

More to come!

So UK banks have now reserved £16bn to compensate customers sold unnecessary or irrelevant insurance. This is still some way short of the often predicted final bill of £25bn, so it is likely that we will continue so see further increases when other banks release their trading figures.

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