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Three of the UK’s biggest banks are braced to increase their provisions for mis-sold loan insurance by as much as a third following a sharp rise in the number of complaints received in recent weeks.
Lenders have been battling to deal with a surge of compensation requests from customers with payment protection insurance (PPI), largely prompted by increased activity from claims management companies.
Barclays is poised to increase the £1bn provision it made to cover PPI claims by about £300m when it unveils results for the first quarter of the year on Thursday.
Royal Bank of Scotland is expected to follow suit by topping up its £950m compensation estimate when it announces its results next week, according to people familiar with its plans.
Meanwhile, HSBC, which lifted its provision from £270m to £400m in February, could not rule out making further increases later this year if complaints volumes remained high.
The industry-wide surge in compensation requests has been fuelled by rampant activity from companies that submit applications on behalf of borrowers, as well as high-profile publicity campaigns by consumer groups such as Which?
These factors have triggered a higher than expected response rate from customers who think they were mis-sold PPI, a type of loan insurance designed to protect them if they became ill or lost their jobs.
The Financial Services Authority initially estimated that PPI would cost the banks less than £4bn but recently revealed they had already paid out £2.5bn. So far the UK’s five biggest lenders have set aside £6bn to cover PPI claims, making it one of the most costly consumer scandals ever.
“Claims management firms have been very aggressive,” said a senior insider at one of the banks. “We are likely to see increased reserves across the sector.”
Barclays highlighted the recent increase in complaint volumes in a regulatory filing last month. The additional charge comes at a sensitive time for the bank, which is facing an investor backlash against its pay policies, with a number of big institutions preparing to vote against its remuneration report at the annual meeting on Friday. Bob Diamond, chief executive, received £25m last year including a £5.75m payment to cover a tax charge.
Lloyds Banking Group, which made the largest provision of £3.2bn, and Santander UK, which set aside £550m, believe they are still sufficiently covered although both are monitoring the situation closely.
Analysts said the PPI provisions were a concern but it was too early to estimate the final bill given the severe fluctuations in recent complaints volumes. Consumer groups had said it could exceed £8bn.
“No doubt this will attract considerable interest over the next couple of weeks as banks put out their quarterly results,” said one.