Bloomberg News

Barclays Sets Aside Additional $1.6 Billion on Misselling

February 05, 2013

Barclays Sets Aside $944 Million More for PPI Compensation

The Barclays Plc logo sits above the entrance to the company's headquarters in the Canary Wharf business district of London. Photographer: Simon Dawson/Bloomberg

Barclays Plc (BARC), the U.K.’s second- largest bank by assets, will cut its bonus pool as it sets aside an additional 1 billion pounds ($1.6 billion) to cover mis- selling of payment-protection insurance and other products.

The bank will reserve 600 million pounds for PPI redress, bringing provisions to compensate customers who were sold the insurance on loans unnecessarily or without their knowledge to 2.6 billion pounds, the London-based company said in a statement today. It also increased provisions for interest-rate hedging products by 400 million pounds as of the end of 2012, bringing the total to 850 million pounds, the highest for any U.K. bank.

Barclays has been under intense scrutiny since it was fined a record 290 million pounds in June for attempting to manipulate the London interbank offered rate and other benchmark interest rates, with the lender’s three top executives, including Bob Diamond, departing. Antony Jenkins, who ran the consumer bank responsible for the loan insurance sales from November 2009 until his promotion to chief executive officer in August, told U.K. lawmakers today that the bank adjusted its bonus pool “substantially” to reflect 2012 events.

“PPI is a very complex topic -- it goes back over 20 years,” Jenkins, 51, told a U.K. parliament committee in London, when calling today’s release “our best estimate” of provisions. “I don’t think the industry, and I include Barclays, responded quickly enough.”

Jenkins Bonus

Barclays will report full-year results on Feb. 12, with Jenkins updating investors on the bank’s strategy on the same day. The shares rose 1.3 percent to 295.25 pence in London today and have gained 13 percent this year, giving the company a market value of 36.1 billion pounds.

Jenkins said earlier this month that he won’t take a bonus for 2012 after a series of regulatory missteps including the Libor fine. The bonus pool will be affected by values and behavior, he told lawmakers, without elaborating.

“The chief executive is responsible for what happens inside the organization and if events of grave consequences happen, the price needs to be paid,” Jenkins said, when asked about his reaction to another scandal following Libor. “If there were a grave regulatory event under my watch, I’d feel obliged to resign, there’s no doubt about that.”

Costly Scandal

The increase in provisions is unlikely to be an attempt to “kitchen sink” the claims, or fully account for all possible customer redress, as the accounting rules for U.K. banks don’t allow for that, said Sandy Chen, an analyst at Cenkos Securities Plc (CNKS) in London. “From our perspective this won’t be a one-off.”

The claims against Barclays and other U.K. lenders are turning into another costly scandal for banks still paying back customers wrongly sold insurance on personal loans. Lloyds Banking Group Plc (LLOY) earmarked 5.3 billion pounds for PPI redress, more than any other U.K. bank. Royal Bank of Scotland Group Plc (RBS) has set aside 1.7 billion pounds while HSBC Holdings Plc (HSBA) took a $2.1 billion charge.

Lloyds may have to provision another 500 million pounds in the fourth quarter for improperly selling PPI and interest-rate swaps following the Barclays announcement, Jason Napier and David Lock, analysts at Deutsche Bank AG, wrote in a note to clients.

‘Mistakes Made’

Lloyds has already set aside 90 million pounds for swaps mis-selling, CEO Antonio Horta-Osorio told the same parliament committee yesterday. HSBC has earmarked $240 million, while RBS, which has provisioned 50 million pounds so far, said it will “meaningfully” increase that amount.

Barclays may have to pay as much as 2.5 billion pounds to compensate customers over interest-rate derivatives, Cormac Leech, an analyst at Liberum Capital Ltd. in London, said on Jan. 31. HSBC and RBS will need to earmark between 500 million pounds to 1 billion pounds, and Lloyds could face 250 million pounds to 500 million pounds in claims, he said.

“Mistakes were undoubtedly made,” Barclays Chairman David Walker told lawmakers today. “We have learned lessons from the past and I really believe it will be different from now on.”

Barclays is also being investigated by the U.K.’s Serious Fraud Office for fees it paid in 2008 to Qatar’s sovereign- wealth fund as the lender sought money to avoid a government bailout.

Shredding Legacy

When asked about his plan to reform the bank’s behavior, Jenkins said he would need to “shred” parts of the legacy of his predecessor, Diamond. An internal report was made following the bank’s 100 million-pound investigation into Libor, he said, adding that he would consider supplying Parliament with a copy.

The bank has not discussed selling its investment-banking unit, he said in answer to a question by lawmaker Pat McFadden.

Labour Party lawmaker John McFall said last week that the commission received testimony from a witness who said in 2000 that the structured-capital markets division of Barclays contributed 110 percent of Barclays’s investment-banking unit’s profit. Today, he asked Jenkins and Walker for more data on how bonuses at the business were decided.

“Structural capital markets is a fancy name for tax avoidance,” said Nigel Lawson, a Conservative who sits in the upper house. “Do you think this is consistent with your statement that we must never again be in a position of rewarding people for making the bank money in a way which is unethical or inconsistent with our values?”

While Walker said the business made only 14 percent of total investment-banking revenue on average in 2000 to 2011 and most wasn’t from tax avoidance, Lawson questioned whether that figure took into account the savings the unit made on Barclays’s own tax bill.

Jenkins said the business will be reviewed, and changes to be announced on Feb. 12 will affect structured capital markets.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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