The mis-selling of payment protection insurance has turned into the most expensive consumer compensation exercise in history for Britain's biggest banks and has dwarved the seemingly meagre provisions set aside to deal with mis-sold derivatives.

To put it into perspective, banks have set aside over £17bn (€20.4bn, $27.4bn) to deal with mis-sold PPI and, on average, 74% of the compensation pot has been spent (see below).

This is significantly more than any of the banks have paid, even collectively, for Libor or Euribor fixing, mortgage probes or any other financial scandal you can think of.

PPI was was originally designed to provide loan repayment cover, should the customer fall ill, lose their job or have an accident. However, after millions of customers complained that they never wanted or needed the policy in the first place, it has opened the floodgates for claims.

Meanwhile, around 30,000 businesses have been eligible for the Financial Conduct Authority's (FCA) review scheme with the banks for the mis-selling of interest rate swap agreements (IRSA).

However, the progress and the amount of time it is taking is a lot murkier than the PPI debacle and banks have only set aside £3.1bn collectively for redress.

According to FCA data, only £15.3m has been paid out in redress (see below).

For those who don't quite understand what an IRSA is, as most of the companies apparently didn't seem to know either when the bank sold them these products, it is this:

Interest rate swap agreements are contracts between banks and customers where typically one side pays a floating or variable rate of interest and receives a fixed rate of interest payments in exchange.

Such contracts are used to hedge against extreme movements in market interest rates over a given period. Companies that saw the value of these products move against them as rates fell during the recession now owe banks inordinate sums of money in yearly interest payments.

Any scandal that essentially rips off the customer is, of course, deplorable but let's get this straight - no one mis-sold PPI has lost their business, livelihoods or hundreds of thousands or millions of pounds - unlike the victims of interest rate hedging products (IRHP).

'Delaying the Inevitable'

The nature of complex derivatives means that, unlike PPI, each product, price, payment and case is different.

This therefore means each claim of mis-selling has to be investigated individually and, due to the complexity of each case, it does take a lot longer to assess.

Furthermore, this has led to some banks working faster than others.

Of course the banks have provided statements on how the process is going, so you can check out all their full up to date statements here.

However, speaking to floods of victims, independent experts, politicians and by looking at regulator statements, the outlook isn't rosy at all.

In an October update, the FCA vented frustration about the progress banks were making and said the regulator had been instrumental in getting three out of the four banks to implement a split payment system to customers.

Let's get this straight - it was not the FCA that was instrumental in doing this, it was the campaigning from lobby groups, such as Bully-Banks, and politicians to the regulator about this concern that made it happen.

Why didn't the FCA enforce that rule when it launched the review scheme a year ago?

That aside, independent financial analysts do not believe that the FCA review is indicative of what is happening or what will happen behind the scenes.

"We do not regard the implied cost-per-case as representative - we expect it to rise - and the "consequential loss" issue remains entirely unresolved," said Ian Gordon in his latest research note for Investec on the RBS stock.

"RBS still appears to be the most underprovided bank for IRHP redress. SELL."

While Gordon points out that investors should sell RBS stock because of "inevitable" rises in IRHP mis-selling provisions in the future, he reveals that some banks are progressing differently than others.

"The lack of meaningful progress during October is unsurprising, especially given that only HSBC (Buy) took a small increase in its IRHP provision in Q3 2013 - primarily reflecting increased administration costs rather than any reassessment of likely levels of redress," said Gordon.

"Despite the fact that HSBC has now made more redress offers than any other bank, it confirms that it has yet to settle a single "consequential loss" claim. So, a long way to go!"

Consequential Losses

The issue over consequential losses, as flagged up by Gordon as well, has become a sticking point and, frankly, an excuse to delay redress payments even further - until now hopefully.

Consequential loss claims, which involve the party providing evidence that it incurred losses as a result of the IRSA, are filed separately to the review scheme.

This originally meant that while a bank can make an initial redress offer - a product tear-up or switch and/or compensation - if a company is claiming for consequential losses on top of this, then it would have to wait until after the banks have assessed the application for damages.

Only recently, after months or even years in some cases of campaigning and pressure from politicians, such as Guto Bebb, have banks decided to change their payment systems.

Well, not all banks.

HSBC was the first to announce that it plans to compensate all customers more quickly with a new system that will pay firms redress before consequential losses are determined.

RBS opted for the same approach a day later.

Barclays is now the only bank out of Britain's largest four financials to not pay redress before consequential losses on a case-by-case basis.

Gordon said in his note that discrepancies over provision and the number of cases at RBS "remain unexplained to us."

Experts have also noted to me that there is a 'ticking time-bomb' over liabilities and consequential loss amounts that banks may stump up.

Critics have said that banks have not been forthcoming with confirming estimates to the press, or to lobby groups, regarding what the potential could be for consequential loss amounts.

This is mainly because they will have to alert investors of provisions made and considering banks around the world are facing scandal after scandal, the last thing they need is to set aside more.

RBS recently revealed that it has not set aside any money for consequential loss payments for victims of mis-sold IRSAs after claiming it cannot reliably measure its liability.

And that's what has caused concern for some analysts like Investec's Gordon.

Show Me the Money

The problem with trying to quantify what redress businesses have received is a lot more difficult that one would initially think.

Redress can include monetary compensation and sometimes it does not.

Sometimes it can be a combination of a tear-up of the product and cash, to the restructuring of the businesses' debt, to allowing overdraft facilities to remain in place. Meanwhile, it is standard protocol for banks to install confidentiality clauses into some of the offers.

In tandem with the review, many businesses try to go through litigation because the process is too slow.

However, again, settlements are usually bound by confidentiality, so even if a business got a payout they wouldn't be able to say for how much or when.

So all we have to go on at the moment is what the banks choose to tell us, and broad collective data from the FCA.

There is no hard deadline for when banks should complete all the reviews, all we have are loose timescales set by the regulator that have already been pushed back.

The FCA said it is writing to all the banks' CEOs to ask for more speed during the review. But why don't they spend some time looking at why the provisions are so low?

What the British financial industry doesn't need is another round of legacy issues threatening the stability of the economy again.




Provision: £8.025bn

Unspent: £1.694bn

Percent of Provision Spent: 79%



Unspent: £1.263bn

Percent of Provision Spent: 68%


Provision: £2.6bn


Percent of Provision Spent: 73%


Provision: £1.845bn

Unspent: £1.368bn

Percent of Provision Spent: 74%

Other Banks

Provision: £1.327bn

Unspent: N/A

Percent of Provision Spent: N/A

Interest Rate Hedging Products


Sales Under Review: 9,728
Provision: £750m


Sales Under Review: 3,371
Provision: £1.5bn


Sales Under Review: 1,936
Provision: £400m


Sales Under Review: 3,296
Provision: £460m

Other Banks

Sales Under Review:872
Provision: -