PPI fines to hit £16bn

Tim Wallace
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TOTAL PPI compensation payouts are likely to hit £16bn, according to new estimates out today, providing a £10bn boost to consumer spending but crippling shareholders and hitting banks’ ability to lend to firms and individuals.

The PPI payouts are reaching such a scale that they are being described as a bank windfall tax in all but name, with the authorities deliberately turning a blind eye to some fraudulent claims by ambulance-chasers.

The new forecasts came as the Financial Ombudsman Service revealed it is looking at taking on another 500 staff to deal with PPI complaints, despite already doubling its workforce in the last two years to 2,500 to cope with the scandal.

The biggest banks have already set aside more than £10bn for PPI compensation, and consultancy Economic Perspectives – one of the few to predict the financial crisis – believes the industry as a whole will eventually pay out £16bn. That is made up of £14bn to customers and £2bn to claims management companies.

The study found 22 per cent of adults have taken out PPI policies, and so far three-quarters of them have claimed or intend to claim.

The average compensation payout stands at £2,900. Between 60 per cent and 65 per cent of the cash paid out or awaited will be spent promptly. And much of that is on splashing out – 15 per cent has gone on holidays, with 12 per cent going to major household goods and five per cent towards a car.

Almost a quarter is taken up by everyday household expenditure.

Meanwhile 17 per cent is used to pay down debts, while 15 per cent is saved.

That has given consumer spending a £5bn boost since the start of 2011, with at least a further £4bn expected.

“PPI payments are reminiscent of the privatisation proceeds of the 1980s and 1990s and are sufficiently large and widespread to influence the seasonal mood,” said Economic Perspectives’ Peter Warburton, author of Debt and Delusion. “While spending on consumer durables, holidays and cars could account for about a third of the payouts, another third is being used to meet everyday expenses. Is this a bank windfall tax in disguise?”

The biggest British banks all increased their PPI provisions in the third quarter, hitting hopes the crisis could be at last lessening its grip.

RBS increased provisions by £400m earlier this month, taking its total set aside to £1.7bn. HSBC added $353m (£220m) to its provisions, to a total of $2.1bn, while Barclays earmarked £700m more, taking its provisions to £2bn. Lloyds has by far the largest war chest – it set aside an extra £1bn, taking total provisions to £5.3bn.

No one yet knows how much the scandal will ultimately cost.