£5.32bn set aside by banks for PPI compensation far outstrips previous estimates

The escalating compensation bill from payment protection insurance mis-selling has reinforced fears that the Financial Service Compensation Scheme’s levy on brokers will soar.

Over the past week, Lloyds, Barclays, HSBC and The Royal Bank of Scotland have revealed their exposures to PPI mis-selling.

And on Monday, the British Bankers Association decided not to proceed with its judicial review of recent FSA guidance on how firms should deal with redress of PPI claims.

The £5.32bn combined sum for the high street banks easily outstrips the biggest estimates (£4bn) previously made about the size of the

PPI compensation bill. Based on Dresdner Bank research estimating that the four lenders account for about 70% of the total PPI market, the final figure could be as high as £7.2bn.

Pinsent Masons partner Alexis Roberts said the increase in the size of the compensation bill raised questions about the FSA’s £35m estimate of the impact of its new guidance. The guidance states that firms must approach customers they think may have been mis-sold a PPI policy.

“The £35m may be an underestimate,” Roberts said.

Biba head of training and compliance Steve White said the full scale of the impact on the FSCS depended on whether a large intermediary, such as failed credit broker Picture Finance, was pushed into bankruptcy as a result of its PPI compensation bill.

Referring to the maximum sum earmarked by the FSCS for the insurance intermediary compensation pot, White said: “If another firm of that size goes under, the £190m cap would come under threat.”

This would put broker fees up.

He added: “The BBA’s decision certainly increases the size of the tsunami that is going to be coming ashore.

“We need to make sure we are off the beach as soon as we can.”

Pass notes: Bank stats

What was the BBA judicial review?
It challenged new FSA guidance that financial service firms found to have mis-sold PPI must contact their clients to allow them to complain.
What now?
The banks' revelations, with the BBA move to drop its review and the FSA guidance, are likely to bring a fresh round of complaints. These are up from 266,685 in the first half of 2010 to 434,596 in the second half.