U.K. Regulator Slaps Banks With £1.3 Billion Redress Order For Mis-Selling Card Protection

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The U.K.’s Financial Conduct Authority (FCA) has ordered 13 global banks and credit card issuers to set aside a total of nearly £1.3 billion ($2 billion) to redress customers who were misled into buying credit card protection plans. [1] The financial institutions – including Barclays (NYSE:BCS), Capital One (NYSE:COF), HSBC (NYSE:HBC), Morgan Stanley (NYSE:MS) and RBS (NYSE:RBS) – mis-sold roughly 23 million Card Protection and Identity Protection policies issued by Card Protection Plan Limited (CPP) over the period 2005-2012.

The credit card protection scandal is the latest to hit U.K.’s big four banks after the payment protection insurance (PPI) and the interest-rate derivatives product mis-selling scandals that came to light over the last two years. Only this time around, several U.S. and other international banking giants also find themselves in the wrong.

It must be mentioned here that the £1.3 billion figure represents the maximum redress amount all the financial institutions may have to shell out. And while the actual amount attributable to a particular bank would depend on the total number of policies it helped sell over the period, the fact that the average redress figure works out to £100 million (~$160 million) means that each of the financial institution will report a sizable charge in its performance figures for the third quarter of the year.

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Entrusted with the task of ensuring that the customers are protected and that the country’s financial system maintains its integrity, the FCA’s predecessor Financial Services Authority (FSA) began investigating into the credit card protection scandal in early 2012 and handed out a fine of £10.5 million to CPP for mis-selling the insurance product. The FSA concluded that CPP had wrongly sold the insurance to nearly 7 million customers by emphasizing on something that the customers did not need in the first place, and by also overstating the risks and consequences of an identity theft to get more customers to sign up for the product.

Keen on ensuring that the wronged customers receive their dues, the FCA subsequently directed the group of 13 financial institutions to pool in as much as £1.3 billion ($2 billion) to duly compensate the customers. The banks and credit card insurers have been held responsible in the mis-selling scandal as they played an important role in pushing the insurance product to customers -pocketing their share of the fees in the process.

So how will the FCA’s decision affect the financial institutions named? First and foremost, the decision represents an increase of £1.3 billion to the already huge £15.5 billion in compensation charges that the British banking giants have set aside over the last two years to redress customers for the products they mis-sold. [2]

Now the fact that the British banks will foot the biggest share of this amount is quite obvious, as they also enjoy the largest share of the U.K. credit card industry. Estimates peg the charges for U.K.’s big-four banks to be half the total amount, i.e. £650 million (~$1 billion). [2] Of this, Barclays’ leadership in the industry would mean that the bank could have to set aside as much as £286 million (~$450 million) as provisions to cover credit card redressals in this quarter.

The chart below represents the amount of provisions set aside by Barclays for its credit card business (Barclaycard) for a year as a percentage of its outstanding loan volume. Assuming Barclays indeed sets aside an additional $450 million as provisions to cover the credit card protection mis-sellings, then the size of these provisions would increase from our current estimate of 3.1% to around 3.8% for 2013. Making appropriate changes to the chart, you can see that this results in a negligible reduction in Barclays’ total share price.

But while the impact of the FCA’s decision on Barclays’ share value from a purely financial point of view is negligible, this does not bode well for the bank’s reputation which has seen customers’ trust in it eroding considerably in the wake of a series of scandals over the recent years.

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Notes:
  1. Redress package agreed for consumers mis-sold CPP insurance products, FCA Press Releases, Aug 22 2013 []
  2. U.K. Banks to Pay $2 Billion for Mis-Sold Card-Insurance, Bloomberg, Aug 22 2013 [] []
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