PPI: Compensation payouts could have £1bn shortfall
Some leading banks may have underpaid compensation certain customers are due for mis-sold Payment Protection Insurance, the BBC has learned.
One expert, commissioned by the BBC, estimates it could amount to "somewhere in the region of £1bn".
The customers potentially affected had PPI on credit cards issued by Lloyds Banking Group, Barclays, MBNA and Capital One.
All claim to make every effort to pay a correct amount of compensation.
The extent of the shortfall is difficult to assess.
The shortfall in compensation arises because, although these banks all refunded the premiums on their mis-sold PPI policies plus interest as regulators require, they have been failing correctly to refund additional charges which were triggered by the premiums of the mis-sold PPI policies.
Some of those premiums put people over their borrowing limits, meaning they were then charged an additional fee.
This failure to include fees and charges in compensation calculations has resulted in dramatic reductions to the amounts some customers have received.
The Financial Conduct Authority (FCA) has told the BBC that it is already discussing the issue with the banks involved.
"If there are penalty fees or charges that arise from the mis-sale of the original PPI, then they should be refundable," said Clive Adamson, the FCA's director of supervision.
In February, Mark Pascoe was paid £5,800 of PPI compensation by the large credit card company MBNA. But MBNA's calculations did not include just over £600 in fees and charges Mr Pascoe incurred since taking out his card in 1997.
According to the claims management company advising Mr Pascoe, had those fees been correctly included in the calculations, his compensation payout would have more than doubled - to more than £13,000.
"It's absolutely outrageous," Mr Pascoe told the BBC. "That's almost robbery, isn't it? They should be fined big time."
MBNA said they would not comment on a case still under review.
Martin Baker, managing director of Renaissance Easy Claim, the company advising Mr Pascoe, says his case is by no means atypical.
Mr Baker says he has identified a string of clients with PPI on their credit cards who suffered compensation shortfalls which run into many hundreds or thousands of pounds.
"It was just another way by which the banks and lenders were trying to reduce their compensation bills," says Mr Baker.
All of the banks concerned declined an invitation to be interviewed on how their compensation calculations work and why they are not fully including the effect of fees and charges, as regulators require.
In a statement to the BBC, Lloyds Banking Group said: "When a customer lets us know that they may have incurred other costs because of their PPI policy, we will investigate and make an appropriate refund."
Regulators have told the BBC that such fees and charges should be included in the initial offers that banks make.
Barclays acknowledged that its previous system, which assessed month-by-month whether a PPI premium had triggered a fee, did not fully capture the cumulative effect of fees and charges, as regulators require.
But it said it had compensated customers who were affected.
"Both our current and historic methodologies have been assured as compliant with regulations. In the case of late and over limit fees, where it is possible to identify that fees have been triggered by the customer taking PPI, we have already repaid them and in recognition that we may not have been able to identify all fees, we have paid additional interest to more than mitigate any customer detriment," a spokesperson told the BBC.
What is PPI?
- Payment protection insurance was designed to cover repayments, in the event of redundancy or ill-health
- It was widely mis-sold, often to people who did not know they were paying for it
- £15bn paid out so far for mis-selling
- £22bn set aside by banks to compensate customers
- average pay-out so far: £3,000 per customer
MBNA confirmed it currently operates a monthly assessment methodology, but one that excludes most fees and charges. MBNA told the BBC: "Because of this, it is not and never has been our practice to refund these fees.
MBNA said their methodology had been independently reviewed and they were confident it was correct.
"The last transaction to be applied to the account at the end of the statement period is the PPI premium (ie, after the over-limit fee has been assessed) and as such, it can never be the PPI transaction that causes an over-limit fee in that statement period," MBNA said.
Capital One declined to reveal its compensation methodology. In a statement to the BBC, the company said: "We aim to pay redress that puts the customer back in the position they would have been in if they had not had PPI."
However, the BBC has learned that the Financial Ombudsman Service has recently instructed Capital One to recalculate two cases of compensation to include fees and charges.
And it has begun investigating how Capital One recalculates its offers in relation to fees and charges across all cases.
It is difficult to establish how much compensation the banks concerned have so far avoided paying their customers, since only they have access to the detailed records required for an accurate assessment.
So the BBC commissioned Cliff D'Arcy to estimate the size of the compensation shortfall and how much banks would have to pay to make it good. Mr D'Arcy spent 12 years as a banker working in the PPI industry.
Now an independent consultant, Mr D'Arcy has become a prominent critic of how banks had mis-sold the product and dealt with subsequent compensation claims.
Mr D'Arcy said: "I'm confident that the figure will be somewhere in the region of £1bn of extra compensation."
He told the BBC: "It was only when I got deeper into the numbers that I realised the scale of this problem.
"It's because banks were charging very high penalty fees, very high rates of interest on borrowing and some of these claims go back decades. So it just compounds and multiplies to a very big number."
The Financial Ombudsman Service (FOS) is the ultimate arbiter of PPI compensation disputes between customers and banks.
Principal Ombudsman Caroline Wayman told the BBC that under the rules, there is no doubt fees and charges triggered by mis-sold PPI premiums have to be refunded to customers.
"If a fee is the result of the mis-sold PPI, it should be given back, and if it's not included, that would be a mistake," said Ms Wayman.
She says she does not how widespread this problem is, but told the BBC: "The first thing is to understand how many times has this has happened and how many times it's had a material impact. That's very difficult to judge."
"Any widespread failure to carry out proper calculations would most definitely be disappointing," she added.
Ms Wayman says credit card customers who suspect their fees and charges were left out of their compensation calculations should go back to their banks to ask what happened.
"If you're not satisfied with the answer, bring it to the ombudsman and we can see what we can do," she said.
FOS has handled about a million PPI compensation cases, with some 400,000 more still in the pipeline. Last year, FOS took on 1,000 new staff to help deal with that backlog.
That caseload is now likely to grow.
But Mr D'Arcy says the Financial Conduct Authority should take the initiative and instructs banks that "charges and the interest on them should be repaid to each and every customer in each and every case".
Listen to Michael Robinson's full report on You and Yours on BBC Radio 4 at 12:00 BST on Thursday, 5 May.