What Lloyds' PPI settlement means for brokers

The decision by Lloyds Banking Group to settle its PPI mis-selling claims has sent shockwaves through the financial services sector.

The biggest surprise of this morning's announcement was the sheer scale of the sum that Lloyds has set aside to settle its outstanding claims: £3.2bn. City analysts that follow Lloyds have been genuinely surprised by the sum.

To put this figure into context, previous estimates suggested that the total compensation bill for all PPI mis-selling would be between £2.5bn and £4bn. As Lloyds had an estimated 25% share of the PPI market, industry sources suggest that the final PPI compensation could top a colossal £12bn.

“The total exposure is probably larger than anticipated,” Pinsent Masons partner Alexis Roberts notes.

Biba head of training and compliance Steve White says: “This only indicates the scale of the problem.”

Shifted liabilities may mean bust brokers

What are the implications of Lloyds' climbdown for brokers’ contributions to the Financial Services Compensation Scheme (FSCS), the fund of last resort for customers who have suffered from mis-selling?

White observes that an earlier decision by Lloyds to quit the PPI market means that its FSCS levy contribution is relatively small compared to the number of policies it has sold. “They are looking after their own rather than contributing to the wider pot,” he says.

Lloyds and other high street banks will be able to shoulder their own compensation payments for PPI mis-selling. However, the headache for brokers is the smaller outfits – typically credit and mortgage brokers – found to have mis-sold PPI products. Such firms could be put out of business by a Lloyds-style jump in compensation payments, meaning that their liabilities will become the responsibility of the FSCS.

White says that the FSA may be forced to raise its assumption that the new rules could lead to 35 business failures. He adds that the ‘tsunami’ of FSCS claims that Biba has been expecting is a lot nearer the beach after today’s announcement.

A smart move for Lloyds

From Lloyds’ perspective, the decision to draw a line in the sand on its PPI claims has been seen as a smart move for recently appointed chief executive Antonio Horta-Osorio.

It puts behind him one of the legacies of his predecessor Eric Daniels’ troubled tenure at the bank’s helm, which included the controversial merger with HBOS. John-Paul Crutchley of UBS says: “The £3.2bn cost of PPI redress is a very significant number but puts Lloyds at the forefront of the industry in terms of dealing with this issue.”

Wider implications

Taking a wider perspective, the statement from Lloyds Banking Group raises questions over the next steps in the British Bankers Association (BBA)’s judicial review of the FSA’s recently introduced rules governing PPI mis-selling.

The BBA has until Tuesday next week to lodge an appeal against the High Court’s verdict rejecting its challenge.

The ‘Big Four’ high street banks, which call the shots within the association, are understood to be divided on whether to pursue legal action on the issue. Lloyds has already run up the white flag with today’s announcement to settle.

Barclays is also understood to be reluctant to pursue the BBA challenge, but HSBC is still keen to appeal. White says: “It suggests that this could be the end of the road for the judicial review.”