Clampdown on payment protection to hit Lloyds TSB

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The Independent Online

A clampdown on sales of payment protection insurance would strangle profits for some of the biggest names in high street banking, one expert warned yesterday.

The Office of Fair Trading is to launch a formal inquiry into the PPI market following a super-complaint from Citizens' Advice three months ago, warning of endemic mis-selling and lack of competition in the sector.

Dresdner Kleinwort Wasserstein, the German-owned investment bank, cautioned that Lloyds TSB stands to lose the most. Its analysts reckoned that Lloyds sold £600m in PPI last year, accounting for huge pre-tax profits of £450m - 14 per cent of total group profits in 2004.

It is the key driver of revenue growth in Lloyds' UK banking division, DKW said. Lloyds leads the unsecured personal lending market, selling most of these loans through its branch network where PPI is sold most successfully. DKW said price controls may be imposed on PPI, similar to the hardline approach taken towards small business banking. That could trim banks' annual earnings by as much as 2 per cent because, DKW said, sales of PPI cost banks almost nothing.

Simon Maughan, the chief banking analyst at DKW, said: "Imagine you aren't selling the product anymore: how many branches would close down? How many staff would you fire? We think the answer is none. PPI is 95 per cent clear profit."

Other banks likely to see PPI earnings dwindle include HBOS and Abbey, which are the country's two biggest mortgage lenders. About 10 per cent of HBOS's earnings are derived from unsecured lending. This accounts for around 7 per cent of Abbey's business.

Lloyds TSB said that it did not break out profits from PPI, but is likely to disagree with DKW's estimates. Lloyds and others are understood to allocate a portion of its costs to PPI, narrowing profit margins.

PPI policies are most commonly sold with personal loans or mortgages to protect repayments should borrowers fall ill or be absent from work for a long stretch. The OFT said earlier this week it had found evidence that consumers had difficulty shopping around for PPI, and that there were high barriers to entry for standalone providers.

The OFT also thought that claim rates on PPI is much lower than on other types of insurance, suggesting that either insurers are turning down an exceptionally high proportion of claims or that consumers are being sold PPI unnecessarily.

Banks' earnings are unlikely to be hit until 2007 or 2008 because of the time the inquiry is likely to take to arrive at its conclusions and for any changes to be implemented.