PPI claims from mis-sold consumers are having a dramatic effect on the financial performance of the UK’s leading banks, according to analysts forecasts, which could affect share prices as the country’s leading retail finance names gear up to publish their annual performance figures.

The next seven days is expected to deliver results from RBS, Barclays, Lloyds and HSBC, all of whom are amongst the most heavily liable banks to the PPI scandal. Reflecting performance in the first half of 2011, accounts from across the industry are anticipated to show a significant depression of profits, with both the lost revenues from PPI sales and the effects of compensation expected to play a major role.

In anticipation of the results, banking shares on the whole have already lost value in the days running up to their publication, and it is thought that revelations of the true extent of the damage will have a further impact on share prices as the markets assess the damage.

But the blow from PPI is not the only factor affecting banking sector performance at the moment, with a number of other problems weighing in to make conditions tough for the country’s largest banks.  Fears over global debt and exposure to some of the worst afflicted European markets is helping shed doubt on the financial picture across the industry.  When taken into consideration alongside ongoing PPI liability, the picture for retail banking looks even more bleak.

While the results will no doubt be seen as a blow for the industry, and will no doubt serve as a painful reminder to the banks of the damage that mis-selling to consumers can do to reputation and balance sheets, the real extent of the PPI problem will only truly transpire over time as an increasing number of claims are settled and compensation payouts materialized.

PPI claims are now at the heart of the day to day operations of banking claims teams, with full divisions of staff dedicated to resolving consumer complaints and compensation demands. With potentially as many as 20 million questionable policies nationwide that could give rise to compensation, the burden now being placed on bank coffers is testament to how central to the business model PPI had become.

Payment protection insurance, which is designed to guard against the risks of defaulting on loan repayments by virtue of accident, illness or unemployment, was initially sold as a complimentary product to all forms of credit, in order to top up the profitability of credit products.  As PPI selling methods gradually became more aggressive, the number of policies sold to consumers on false pretenses or sold to consumer who were known to be unsuitable grew to epic proportions, providing the banks with substantial additional revenues which helped prop up balance sheets across the industry.

With PPI sold so widely, it became an important aspect of the financial model of lending to consumers, and as a result is now causing significant difficulties as banks scramble to meet their compensation obligations.

As banks are now continuously engaged in addressing consumer complaints, the real importance of PPI is beginning to crystallize. Since the Judicial Review hearing in April 2011, banks have been unable to depend on the vast profits delivered by PPI. But the secondary blow in the form of compensation payable to mis-sold consumers has the effect of doubling the damage to the banks, at a time when banking balance sheets are already more vulnerable than they have been for generations. With PPI, so crucial to the retail model, now largely unavailable to banks as a compliment to lending product, the search is now on for alternative means of raising revenue to combat the loss of PPI.

PPI claims by the bucket load have invaded the customer service desks of banks and finance companies up and down the country as consumers look to demand redress for mis-sold PPI policies.  While consumers chasing compensation is one thing, lenders are also now coming under intensified scrutiny from the regulator, with the FSA continuing to clamp down on the kinds of mis-selling practices that led to so many consumers becoming victims of the PPI scandal.

Liverpool Victoria Banking Services, the lending division of insurance and financial group Liverpool Victoria, has been fined some £840,000 by the Financial Services Authority (FSA) in respect of PPI mis-selling, reflecting the severity of the behaviour uncovered by FSA investigations into the selling practices used to shift unnecessary and unwanted PPI cover.

Liverpool Victoria were found to have been mis-selling PPI by lumping premium costs in with loan repayments, effectively not disclosing the sale of PPI to the consumers that were sold it. In fact, FSA investigations revealed that some 60% of all calls monitored failed to live up to the selling guidelines, and as a result the FSA has imposed today’s substantial fine.

PPI was sold by lenders like Liverpool Victoria in a number of ways which disguised its presence, its costs or its applicability, in a cynical endeavour to boost ailing banking profits.  In the comparatively less profitable world of retail banking, PPI provided a vital lifeline for banks looking to kickstart their revenues after a shaky decade for the industry as a whole, resulting in widespread mis-selling and now widespread compensation as complaints are handled by the courts, the Ombudsman and the banks themselves. While the fine is towards the larger end of the scale, it is thought that its impact will be felt throughout the group, and will serve as yet further punishment for their part in mis-selling PPI to unsuspecting consumers nationwide.

PPI claims are reverberating throughout the retail banking industry as the country’s leading financial names continue to count up the costs of mis-selling and compensation. One of the more heavily exposed banks is Santander, the Spanish banking group that bought Abbey National amongst others, who have today unveiled the damage caused by PPI for the first half of this year.

Pre-tax profits at the bank’s UK division were down by 3% on the year, while the group itself saw profits fall by over a fifth. In addition to the top line profit impact, which saw the UK arm of Santander shed some £1.2bn from comparable figures last year, the group has also set aside reserves to deal with their compensation liability to the tune of almost £550m, placing it in the top 4 worst offenders with Barclays, Lloyds and RBS.

Reserves are being set aside across the industry with a view to curbing the impact of PPI compensation claims, with Lloyds leading the charge with some £3.2bn already set aside.  Some analysts are suggesting the costs of PPI may even rise up to over £10bn with time, as the banks continue to pay off claims and clear their way through the backlog that has amassed since the High Court ruling in April. With so much at stake, it’s perhaps easier to understand the reluctance of the industry to admit to its failings and accept its obligations to compensate.

Meanwhile, a number of other leading banks are expected to be just days away from publishing their own performance reports, which analysts are expecting will show a broadly similar impact on their profits for the six-month period to June. As the industry continues to pay dearly for the mis-selling scandal, only time will reveal the true extent of the damage to banking balance sheets and reputations.

As PPI claims continue to cause problems for consumers and banks alike, the lens of blame is focusing even more squarely on the banks that mis-sold policies in the first place, and the reasons and grounds on which consumers were mis-sold.  One of the most central criticisms of the PPI cover sold by banks was that it represented poor value for money as compared with independently available cover, and as it result was pushed unfairly onto a large number of lending customers.

PPI cover is designed to provide a safety net for lenders who are dependent on a regular employment income to meet their repayments. It acts as a backup for unexpected, unforeseen circumstances like an accident or bout of illness which might otherwise render default an inevitability, protecting the credit ratings and the integrity of the consumer’s relationship with the lender. The premiums for PPI policies were often charged in the thousands, and depending on the size of the original loan, PPI costs could easily be as much as the loan repayments themselves, effectively doubling revenue for the banks involved in mis-selling.

These costs do not compare favourably with independently available policies.  PPI is at its core a valuable insurance product that meets the needs of some lenders, albeit a much small number than those that were sold PPI during the height of the scandal. However, in contrast to independently marketed policies, those offered by the banks were more expensive by and large, and offered a lesser extent of cover than consumers could purchase elsewhere.

This was one of the factors taken into consideration by the regulator and the authorities in considering the legitimacy of the banks sales tactics. With banks effectively exploiting the ignorance of consumers, they were able to sell unwanted and unnecessary policies which were at any rate not representative of good value for the consumer.

PPI claims are continuing to cause difficulties for the UK’s major banks following a dramatic increase in new claims to add to the growing backlog of complaints from aggrieved PPI customers.  With PPI policies mis-sold to potentially as many as 20 million lenders nationwide, and the outcome of the High Court ruling favouring the consumer in the fight for compensation, bank claims teams are continuing to find their desks swamped with claims old and new, with average compensation values over £2000 making for a serious impact on profitability.

Big name banks mis-sold payment protection insurance on an industrial scale, offering this essentially niche insurance product alongside loans, credit cards and mortgages to the majority of their customers– sometimes leading customers to believe cover was a necessary requirement for loan acceptance, and selling even in cases where the bank knew or ought to have known the policy would be ill-suited to the needs of the consumer. As a result, the banks are now liable to compensate all those customers that were mis-sold, and the total compensation bill is expected to run into the thousands.

Since the High Court ruling in April of this year, the number of claims handled across the industry has rapidly increased, simply down to the combination of increasing consumer awareness and more rigorous obligations on the part of the banks.  While the industry has been given additional time to cope with the backlog, it remains foreseeable that PPI claims and PPI claims disputes will continue to run on for the immediate future as banks and lenders try to satisfy millions of unhappy, mis-sold consumers. However, while the monetary cost in compensating consumers can be written down in the year, the implications on reputation and credibility across the industry will no doubt continue to be felt for years to come.

PPI claims have seldom been far from the headlines and the financial pages of the national press, with consumers from all backgrounds clawing back thousands of pounds in compensation from some of the biggest names in high street banking.  While the PPI scandal has received much of the media attention of late, little heed has actually been paid to PPI itself, what the product stands for and how it actually works.  While for the most part, consumers were aware of being sold PPI with their lending products, there were a number of instances where customers were unaware of what PPI was, how it works and whether or not it would prove beneficial to them over the lifetime of their loan repayments.

Payment protection insurance is a type of insurance policy aimed at covering loan, credit card or mortgage repayments in some unforeseen circumstances.  The circumstances covered by PPI typically include an inability to pay as a result of illness, accident or unemployment, and for some consumers (particularly those with secured loans), this can be an invaluable safeguard against the unexpected.

As an insurance product, PPI is a perfectly legitimate way to guard against the risk of defaulting, and can even be a useful tool in preventing default for those consumers covered by it.  However, PPI is most certainly not the mass market product that the banks made it out to be, and the sales tactics used by the banks meant that their obligations towards treating customers fairly were largely ignored. As a result, consumers ended up buying PPI cover they didn’t want or need, or that they couldn’t use, and at any rate paid over the odds for the cover they were getting, which has led to the largest consumer financial scandal in history in the shape of PPI mis-selling.

PPI claims in their hundreds of thousands are being settled steadily across the industry, as banks finally own up to their obligations and responsibilities and compensate consumers that have were wrongly mis-sold. Years after the issue of irregular PPI selling was raised in the consumer press, and after lengthy legal wranglings between the banks and the regulator, the whole PPI scandal appears now to be on the road to resolution. But as banks continue to feel the pressures of piles upon piles of compensation claims, is the end really in sight for consumers affected by the scandal?

PPI mis-selling has been described as ‘industrial’, but to truly understand the scope of the problem you need to appreciate the kind of tactics the banks were using to promote these products.  So lucrative was the PPI upsell that banks often bundled premiums in with the cost of repayments, or told consumers that cover was a necessary pre-requisite to loan acceptance. Through the height of the scandal, virtually all customers who took out loans, credit cards and mortgages from most notable lenders were offered PPI, despite an obligation on the part of the banks to treat customers fairly and make enquiries into whether PPI would be a suitable product for the consumer’s needs. This has led to potentially millions of policies being mis-sold, which in turn means potentially millions of claims for the banks to process and compensate.

Following on from the High Court ruling in April, the PPI mis-selling scandal has rapidly begun to unwind, with banks now almost uniformly accepting their obligations to compensate aggreived customers.  While the banks remain less than satisfied over the outcome, it seems now only a matter of time before those consumers that are entitled to compensation see a near conclusion to the whole affair.

PPI compensation claims have shown the banks in a particularly bad light, with potentially as many as 20 million PPI policies sold – many illegitimately – to consumers along with loans, credit cards and mortgages.  Despite a public, regulatory and even judicial backlash against the banks, many in the industry still quietly feel they’ve been given a rough deal.  In fact, senior executives at the British Banking Association have even gone so far as to express their disillusionment publicly, at a time where those sentiments seem particularly insensitive and ill-judged. But is there any merit to the way the banks are feeling, and do they have justification to be feeling hard done to?

By all accounts, the banks have acted irresponsibly in selling PPI policies to those that didn’t need or want the cover, adding thousands of pounds to the cost of repayments. Under obligation to treat customers fairly, banks choose to follow the letter of the guidelines relating to the sale of PPI cover, ignoring overarching responsibilities put in place by the FSA.  From that perspective, some in the industry feel that they complied largely with the guidelines that were in place, and feel aggreived at their apparent victimisation in the media and at the hands of the regulators.

Be that as it may, the fact still remains that banks were knowingly mis-selling PPI cover to consumers who didn’t want or need the product, and in many cases PPI was bundled in with loan repayments amounts or put forward as a compulsory step towards the acceptance of the loan.  In this respect, banks have clearly not been ‘treating customers fairly’ in the everyday sense of the term, and as a result have subsequently felt the full force of the regulators, the Ombudsman and the courts.

PPI claims have long since reached critical mass, and the implications for banks, regulators and consumers alike have been staggering.  Aside from a momentous ground-shift in the regulatory framework, the effects on coffers at banks nationwide have been profound, exposing already fragile banks to potentially massive liabilities in the form of PPI payouts. Perhaps understandably, the banks are still reluctant to offer wholesale redress to PPI customers, and they are continuing to obstruct the process as far as possible to try to minimise their overall exposure.

The Financial Ombudsman Service plays an almost judicial role in the process, and serves as an arbiter of first instance for consumers who are finding themselves getting a raw deal from the banks.  Complaints that are lodged with banks and not satisfactorily resolved within 8 weeks can be referred on to the Financial Ombudsman Service, who have the authority to create a judicially enforceable ruling if it favours the consumer, without prejudicing your rights to carry the case forward to court.

Unlike the courts, the Ombudsman has the ability to make decisions based on parameters that go beyond the strictly legal, including taking into account fairness and the way in which the claim has been handled.  This allows the Ombudsman to often give rulings in the first instance that would otherwise be unavailable to courts, which are more restricted in what they can do.

The Financial Ombudsman Service was set up under the Financial Services and Markets Act 2000 to provide an alternative avenue for consumers to seek redress in disputes with banks and other lenders. In this sense, it can be of great assistance to those affected by PPI mis-selling, and can provide a more direct and accessible route to enforcement than the often lengthy, more restrictive court processes.