Barclays, HSBC take $2 billion mis-selling hit

LONDON Mon May 9, 2011 9:10am EDT

A worker carries out maintenance in a branch of Barclays bank in central London in this February 15, 2011 file photograph. Barclays Plc set aside 1 billion pounds ($1.6 billion) to compensate consumers who were wrongly sold insurance, as British banks as a whole backed down in the fight against accusations of mis-selling. ''We don't always get things right for our customers; when we get them wrong, we apologise and put them right,'' Barclays Chief Executive Bob Diamond said in a statement. REUTERS/Paul Hackett/Files

A worker carries out maintenance in a branch of Barclays bank in central London in this February 15, 2011 file photograph. Barclays Plc set aside 1 billion pounds ($1.6 billion) to compensate consumers who were wrongly sold insurance, as British banks as a whole backed down in the fight against accusations of mis-selling. ''We don't always get things right for our customers; when we get them wrong, we apologise and put them right,'' Barclays Chief Executive Bob Diamond said in a statement.

Credit: Reuters/Paul Hackett/Files

LONDON (Reuters) - British banks gave up their fight to avoid compensating customers wrongly sold loan insurance, forcing Barclays Plc and HSBC to take a combined hit of more than $2 billion in the latest blow to the industry.

Barclays Monday booked a 1 billion pound ($1.6 billion) provision for the second quarter of 2011 to cover costs related to the mis-selling of payment protection insurance (PPI), while HSBC Holdings Plc said it had set aside $440 million.

British banks, already under pressure from regulators to clean up their act following the financial crisis, said they would not appeal against a ruling requiring them to pay compensation. The bill could total around 8 billion pounds and several millions of Britons could be in line for a payout.

Britain's financial ombudsman said Monday it had so far received more than 200,000 complaints over PPI insurance and that the average compensation payout was 2,750 pounds.

Lloyds Banking Group Plc was first to capitulate over the issue last week as it unveiled a shock 3.2 billion pound charge to cover compensation after years of legal wrangling.

Barclays and HSBC shares fell 1.3 and 1.6 percent respectively in early-afternoon trade, underperforming a 0.6 percent decline in Britain's benchmark FTSE 100 index.

"This is another negative for the banking sector. It means even more costs for the banks, which were already facing mounting costs on their capital structures," said John Smith, fund manager at UK investment firm Brown Shipley.

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Banks face higher costs from plans by a government-appointed commission to make them hold more capital and form separate subsidiaries for their retail and investment banking operations, an effort to better protect retail customers and shield the banks in the event of another financial crisis.

Bank overdraft fees also remain in the spotlight after being criticized for being opaque by Business Secretary Vince Cable and parliament's Treasury Select Committee.

And the PPI payouts have parallels with a previous British mis-selling scandal involving endowment mortgages, which became popular in the late 1980s and early 1990s as homebuyers took interest-only home loans backed by investment plans intended to pay off the principal.

But returns often fell short and providers were subsequently forced to pay compensation to many lenders. The Financial Services Authority (FSA) said in 2006 banks had paid out 2.2 billion pounds in compensation for endowment mis-selling.

PPI policies were typically taken out alongside a personal loan or mortgage to cover repayments if customers fell ill or lost their jobs.

But the policies were sold to self-employed or unemployed people who would not have been able to claim and to consumers who did not realize they were taking out a policy.

Last month a court ruled the banks were at fault.

"I hope the banks learn the lessons of this debacle, adopt a more constructive attitude toward serving their customers and make sure this never happens again," said opposition Labor MP Chuka Umunna, who sits on the Treasury Select Committee.

Barclays said it had agreed with the FSA to contact customers and assess the situation.

"We don't always get things right for our customers; when we get them wrong, we apologize and put them right," Chief Executive Bob Diamond said in a statement.

Royal Bank of Scotland (RBS) said last week it was too early for it to estimate the possible impact but said settling claims could be "material."

Deutsche Bank analysts have said RBS could face a 1 billion pound provision on the PPI mis-selling.

Bank of America has also raised its provision for mis-selling to $650 million from an original $592 million.

Spain's Santander had not challenged the findings of regulators and has already been paying compensation.

"It should not really affect banks' long-term earnings forecasts, but the PPI issue is yet another negative for the sector," said Royal London Asset Management fund manager Jane Coffey.

(Editing by Paul Hoskins and David Holmes)

($1=.6100 Pound)

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