Rising PPI Claims Carry Risks for Bank Shareholders

The payment protection insurance scandal has become the largest financial scandal in the country. Unfortunately, it has continued to grow over the past year. The Financial Ombudsman Service said the number of new complaints increased by 100% since 2012 when customers filed nearly 380,000 claims. This is discouraging news for shareholders at the country’s largest banks.

The banks have been trying to avoid the consequences of their actions. They rejected many of the claims that were filed from customers and blamed the claims companies such as PPI Claims Co for the epidemic. They temporarily changed their tune and began approving more of them after the Financial Services Authority imposed fines earlier this year and created departments devoted exclusively to processing PPI claims and hired hundreds of people to fill these roles.

However, they have started rejecting claims again in an attempt to mitigate their losses as meny people . They had to set aside nearly £14 billion to handle new claims and repaying their customers is weighing heavily on their profitability. Patrick Collinson of the Guardian said the £14 billion probably won’t be nearly enough to repay all of their outstanding obligations.

The shareholders at the country’s largest banks are becoming increasingly concerned about the cost the of the crisis. The banks already have significant liability problems that need to be addressed. Earlier this week the Prudential Regulation Authority found that five of the High Street banks needed to be much more proactive about fixing problems with their balance sheets.

The regulator has discovered that their debts was over £27 billion, which is higher than originally estimated. Barclays alone is facing a deficit of £3 billion. The PPI scandal is the cause of much of the banks’ strife as have paid a couple billion pounds already and will be paying considerably more in the near future.

The one thing that is encouraging for shareholders is that the rate of rulings in favor of customers has finally started to taper off. The Financial Ombudsman Service upheld nearly 85% of PPI claims in 2011. That figure fell to 70% last year and has fallen again to 50%.

This could mean that the losses the banks will endure could be lower than originally anticipated. However, the cost will still be significant and the banks will be in for a rude awakening when the bill for their transgressions needs to finally be paid.

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