The financial regulator needed an advert arresting enough to cut through the cold-calling clamour about payment protection insurance to alert people that they have just two years to make a claim. It came up with an animatronic head of Arnold Schwarzenegger mounted on caterpillar tracks who hectors shoppers in a supermarket to make up their mind about whether they want to claim.
The advert is repulsive and compelling — well done M&C Saatchi — and it also gets to the nub of the matter. Everyone knows about the huge PPI mis-selling banking scandal but an astonishingly small number have made a claim. The Financial Conduct Authority has launched the Arnie advertising campaign to alert people to the fact that they have two years to act before a deadline of August 29, 2019.
The FCA believes 64 million policies were sold on products ranging from mortgages to credit cards to credit agreements to pay for household goods, mainly in the 1990s, but that only 12 million people have claimed. Many among that group have made more than one claim each, but still there are about 30 million policies for which no compensation has been claimed.
Some people may be quite happy with their PPI policy, which was officially intended to offer cover for loan repayments in case someone lost their job or became ill. But in most cases, it is widely assumed that people do not know they had the policy.
The key question for banks is what the deadline will do to people’s behaviour. Will it lead to a manageable increase in claims for a period of time before the shutters finally come down on the UK’s biggest mis-selling affair, a scenario planned for by banks which have recently topped up their coffers in anticipation?
Or will it actually lead to a stampede of new claims and very high uphold rates, forcing banks to take large additional provisions?
The variation of outcome is of huge significance, both to the most exposed — Lloyds has already set aside £18.2 billion, including an extra £700 million provision just in the second quarter of this year because of higher than expected claims.
And also to some of the smaller banks caught up in the mess. Clydesdale bank has so far set aside £1.8 billion, a hefty sum compared with its size and half the amount that HSBC has so far incurred.
Analysts at Goodbody yesterday warned that the bank, which separated from its parent National Australia Bank and floated in February 2016 was “the one to watch”. Clydesdale and Yorkshire Bank was given a £1.7 billion dowry by NAB to help it pay for a plethora of conduct problems and has already burned through more than £1 billion of that.
Clydesdale has built up a pot of almost £500 million for more PPI claims. That may still turn out not to be enough, forcing the bank to dip into the indemnity again.
Investors might fear even that may not be enough, forcing its shareholders to take the hit.
Additional provisions would be a blow for banks which, according to the think-tank New City Agenda, have incurred £43.5 billion in compensation and other costs. But it is the lesser of two evils.
A claims management company has challenged the deadline in court. We Fight Any Claim is trying to overturn the two-year cut-off on the grounds that under EU law, the Financial Ombudsman Service has the power to resolve disputes, not the FCA.
The company’s first attempt in court was thrown out and it is now gone to the Court of Appeal. Were the claims group to be successful in its action, it would hit banks’ share prices hard.
MY ADVICE Hold
WHY Banks can easily cope with some additional provisions and it is likely that the Financial Conduct Authority’s deadline will hold
Petrofac
When the environment becomes hostile, it is sensible to go into survival mode. That is what Petrofac is doing.
The oil services company is hunkering down for the long haul to cope with an investigation by the Serious Fraud Office and a tough market environment.
The question for the company, and its shareholders, is whether its troubles are likely to get worse or recede. One big challenge for Petrofac is that the SFO case could take two to four years to resolve, based on similar investigations.
That is unhelpful for investors, as it is very difficult to tell whether Petrofac will end up being punished, or to what extent it could be penalised, over the investigation which centres on Unaoil, a Monaco-based consultancy business.
There are other adverse conditions too. Primarily, they are the falling price of oil and other commodities, which has led to a drop-off of work. There are some smaller problems too, such as Petrofac’s Mexican business being undermined by a change in the country’s rules over ownership of its energy market.
Ayman Asfari, Petrofac’s chief executive, said candidly yesterday that he was “trying to protect the business”. The next year or two will be about “executing very, very well”, focusing on the core engineering and construction business and cutting back the “integrated energy services” business.
Some believe that could lead to the loss-making division, which manages whole oilfield projects for clients and has proved to be overly complex and capital intensive, being almost completely shut down.
Yesterday’s half-year results, which saw underlying net profit fall 4 per cent to $158 million, were better than the market had expected. Encouragingly, its “backlog” — the pipeline of new business — amounted to $12.5 billion, equivalent to about two years’ revenues. New clients have not been put off by the SFO inquiry, Mr Asfari insisted. Key to the company’s future will be whether that insouciance continues.
Petrofac’s shares have halved since the SFO investigation began, and yesterday they fell 2.3 per cent to 413½p. Until its future becomes clearer, they are not worth the risk.
MY ADVICE Avoid
WHY Too many uncertainties and no sure remedies
