UK banks are likely to breath a sigh of relief following proposals to put a time limit on claims over mis-sold payment protection insurance (PPI). The Financial Conduct Authority expects to conclude a review by the end of this year, with rules coming into force in the spring of 2016. After that, there will be a two-year deadline, which means claims could be made up until the spring of 2018.
Major banks have already set aside more than £26bn to cover claims from 10m customers who were mis-sold PPI, and the proposed timetable has attracted criticism from the banks for being too long. Inevitably, claims management companies will push hard to put in as many claims as possible before the deadline, and banks are expected to face a further £15bn PPI bill in addition to the £20bn already paid out. The number of complaints has been falling steadily, but in the first half of this year there were still nearly 900,000 customer claims. Total PPI compensation in July totalled £328m, down 19 per cent from June and 14 per cent from a year earlier.
And to rub further salt into the wound, the FCA will launch an advertising campaign to encourage consumers to complain ahead of the deadline, the cost of which may have to be borne by the banks themselves. However, some may feel that the banks will still get off lightly for their part in the UK's largest ever compensation claim, as in the 20 years since PPI started around 45m policies were sold generating £44bn in premium payments.
Of the five big banks, Lloyds Banking (LLOY) has set aside the most at £13.4bn, and while the claims look set to pour in for some time yet - Lloyds alone is expected to face a further £1.5bn in claims - the timetable will draw a line under the whole wretched business, and will provide greater clarity over potential earnings. And having taken a £1.4bn 'top-up' charge in the second quarter of this year, some analysts are suggesting the bank won't need to make any additional provision in the third quarter.
This is especially significant for Lloyds following news that the government is planning a retail offering of shares in Lloyds sometime in the spring of next year. The state-owned stake has been falling steadily from 43 per cent in 2009 to 12 per cent, and the retail offering is expected to raise a minimum of £2bn.
Meanwhile, the drip-feed sales via Morgan Stanley are set to continue. The retail offering will come with two inducements; the first being a 5 per cent discount to the market price. There will also be a one-for-10 bonus share if the shares are held for 12 months. To accommodate for the shares taken up as a result of the bonus scheme, sufficient shares are likely to be held back which equates to £200m on a £2bn sale, so Lloyds will not have to issue any new shares.
