Filed Under:Markets, E&S/Specialty

Mis-Sold Loan Insurance Costs Lloyd's Another $1.6B, Dragging Down Q3 Results

LONDON (Reuters) - Lloyds Banking Group took another 1 billion pound ($1.6 billion) hit to compensate customers mis-sold loan insurance, taking its charge for the scandal to 5.3 billion and dragging it to a third-quarter loss.

Britain's biggest retail bank had already set aside 4.3 billion pounds to repay customers wrongly sold payment protection insurance (PPI), far higher than rivals as it had the biggest share of the market for PPI products - w hi ch have become one of Britain's biggest consumer finance scandals.

Lloyds, which blames claims management companies (CMCs) for exacerbating the problem by submitting false claims, said it had paid out or spent 3.7 billion pounds on the issue by the end of September, or 70 percent of its previous provisions.

Like other British banks, Lloyds faces multi-billion pound losses to cover wrongly sold insurance on mortgages and other loans, often to people whose circumstances meant they were barred from making claims.

But the PPI scandal is only the latest instance of British banks being found to have mis-sold products, a list that also includes the sale of specialist financial products known as swaps to small business, some of whom were left with big losses rather than the protection against interest rate moves they expected.

Lloyds has said around half of the PPI complaints it receives are from CMCs, which take a sizeable chunk of the payouts in return for handling the paperwork for clients.

Along with other banks, Lloyds has complained that a high proportion of PPI cases received from CMCs are erroneous and involve individuals who do not even have a policy with the bank.

Lloyds has an army of 6,000 workers dealing with PPI complaints, of which 1,000 are working on erroneous complaints.

Around 50 percent of claims from the worst-offending CMCs are invalid, banks say, substantially increasing their overall bill and eating up cash that could be used for lending.

Lloyds declined to say what proportion of its overall provisions are spent on administering false claims.

The total cost of payouts for the industry could hit 15 billion pounds and some analysts have estimated Lloyds' final PPI bill could rise to as much as 7.6 billion. Barclays said earlier this week it took a PPI-related charge of 700 million pounds in the third quarter, taking its total to 2 billion.

 

MORE CLARITY

Consumer group Which? puts the current bill for the industry at 12.3 billion pounds. It has called on banks to provide more clarity on how many more complaints they are expecting and publish monthly updates on the amounts that have been paid back.

"The banks have been in denial about the true scale of this scandal. Their piecemeal approach to topping up provisions is an inadequate response to what is now the biggest financial mis-selling scandal of all time," said its CEO Peter Vicary Smith.

On a more positive tack, Lloyds announced falling losses from loans that turn sour and said its cost-cutting programme was ahead of target.

The bank has reduced its loan book, cut costs and reined in bad debts as part of a recovery plan devised by Chief Executive Antonio Horta-Osorio to turn round the bank, which was bailed out in 2008 leaving Britain with a 40 percent stake.

Lloyds reported a pretax loss of 144 million pounds for the three months to the end of September, compared with a loss of 607 million a year earlier. However, its underlying profit rose to 840 million pounds from 419 million a year before.

Shares in Lloyds were up 2.5 percent to 43.1 pence at 1215 GMT, outperforming a 0.9 percent rise in the European banking index, as progress in the bank's recovery plan overshadowed the increased cost of correcting past wrongdoing.

The bank, which also made a further 150 million pound provision in relation to German insurance business litigation, said uncertainties remain as to the eventual cost of PPI and says it will be in a better position to make an assessment at the time of its yearly results next March.

"The predominant uncertainty is simply around the complaints volumes," said finance director George Culmer.

Britain's Financial Ombudsman Service, which deals with cases where banks and their customers cannot agree a settlement, said last month it is getting up to 400 complaints an hour in relation to PPI.

Craig Lowther, managing director of claims management firm MoneyBoomerang, says banks had underestimated the scale of their exposure. "The banks know exactly what they are liable for in terms of mis-sold PPI, but they're announcing it in tranches every few months to protect their share price."

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