Just when you thought it was safe to dip your toes back into the banking sector, an ugly monster rears its head once again.
The payment protection insurance (PPI) mis-selling scandal has already taken a 26bn bite out of UK banks and now it can sense blood again.This will come as a shock to investors who thought compensation claimants had finally had their fill of red meat.
Earlier this year, Standard & Poors assured markets that the worst period for PPI provisions has now passed. Now the banks could be on the hook for even more deeply woundingpayouts.
Commission Impossible
As well as being sold insurance they didnt need or couldnt claim on, many PPI customers were charged hefty commission payments on top.
Last year, the Supreme Court ruled that banks and insurers broke consumer protection rules by failing to tell customer Susan Plevin how much commission she had been charged.The Financial Conduct Authority (FCA) is now reviewing the case and will shortly decide whether PPI claimants who were denied compensation have a fresh case.
A study by Autonomous, chaired by former financial services minister Lord Myners, suggested this could cost the banks as much as 33 billion if also applied to other products, such as personal loans. That could leave banks exposed to an even greater savaging than they have already suffered, with predictable consequences for shareholder value.
You can imagine what the new ruling will do to the share prices of Barclays (LSE: BARC), Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland Group (LSE: RBS).
Barclays and RBS have alreadyacknowledged the dangers, warning that they would suffer material losses if caught once again in the regulators jaws.
Fine Inflation
Once again, dividend maestro Neil Woodford has been shown to be prescient. He dumped all his holdings of HSBC last September over fears that banks face unquantifiable fines from regulators.Since then, the fines have been served up on a conveyor belt, but the worse could still be to come.
Lloyds will be hit particularly hard if the FCA does rule that millions can re-apply for compensation, as it faced most exposure in the original crisis, with provisions totaling 14 billion. But all three will be heavily punished, alongsideinnocent investors.
Banks Bashed Again
This isnt a done deal. The FCA may decide there isnt a case to answer. But itis another dark and threatening shadow hanging over the sector.
Given how hard the regulators have clamped down onwaywardbanks in recent years, I would personally be surprised if they decided to let up now. In the Plevin case, almost three-quarters of her premiums went on commission.
Ironically, nobank was involved in her test case. She paid PPI on a personal loan taken out through Paragon Personal finance, and insured by Norwich Union. But the banks could be the biggest victimsof all.
Every time the banks try to escape the shadow of scandal, it pulls them back in. Investors have learned to shrug their shoulders ateach new fineand buy and hold regardless, but another 33bn could make many think again.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.