Customers who have purchased payment protection insurance (PPI) from Lloyds Banking Group, one of the largest banks in Britain, may have found a loophole. This loophole has allowed them to cut the compensation that customers believed they were going to get. It is possible that the compensation awards have resulted in tens of millions of pounds being cut away, leaving the bank that much wealthier.

A third of the ownership of Lloyds Banking Group belongs to the taxpayers. They have been reducing the payouts to individuals who were mis-sold the insurance. They have legally reduced the compensation, but that doesn’t make it any easier for people to accept what has happened.

Lloyds PPI Claims Loophole

Apparently, the bank has found a rule that is permitted by the financial regulator that allows them to take this action. The bank has set aside close to £10 billion for payouts to those who were mis-sold policies, as well as loans and credit cards.

The loophole has to do with those who bought a single premium PPI policy. The insurance costs where charged up front and then added to the loan. These are the people who are not getting all of their money back. The bank has decided to deduct the cost of the cheaper, regular policy from the payout. This is because the customer would likely have bought one of them as an alternative.

As outlined by the Financial Conduct Authority (FCA), such action is permitted under the “alternative redress” rules because it would allow a customer to make a claim.

The BBC has reported on the issue, calling it a “scandal coming out of a scandal.” People purchased the PPI insurance because of being misguided. Then by Lloyds Banking Group not paying the full amount, the taxpayers are being deprived of their rightful compensation by a tax-payer owned bank.

The bank offers one amount and then the Financial Ombudsman Service is involved, often ordering the bank to pay an additional amount. Approximately one quarter of the cases against the bank in 2013 were settled in this manner because the bank has found a loophole that it wants to use in order to short the very people that support the bank.

The Financial Ombudsman has that that the alternative address complaints were still only a small percentage of the complaints regarding PPI, though there was a growing number of such complaints, which is why there is a sudden spotlight on Lloyds Banking Group. Those who feel that they are not getting the correct payment from their bank are urged to contact the ombudsman for assistance in sorting out the issue.

A spokesperson from Lloyds has come forward to explain what is going on. The spokesperson says that there were a small number of customers who were eligible for PPI and chose to purchase a single premium policy. Had they been given the option, they would have gotten the regular premium policy instead. The spokesperson also goes on to site the FCA handbook as being clear in such circumstances in terms of what they did. Based upon the PPI complaints in Quarter 4, approximately 11 percent of the people were given comparative redress.

The problem with the redress is that Lloyds Banking Group has gone on the assumption that people who were sold the single-premium PPI policies would have gone on to purchase a cheaper regular premium policy. As a result, they are subtracting this cheaper policy from the payout that a person would otherwise receive, thus saving themselves money. Whether people are actually being given this cheaper policy to coincide with their loan is unclear.

Many people argue that they may not have gone with any kind of PPI or would have gone with another company and therefore it would be impossible for Lloyds to assume that they would choose that particular product. The scandal has taken a while to reach the light of day and many financial advisors have commented that they are surprised it has taken this long.

It is possible that payments have been reduced by one of every four PPI claims, a number that is more than double the 11 percent that the Lloyds spokesperson shared with BBC. Lloyds may have been able to save themselves tens of millions of pounds by using this loophole. While they may have saved themselves money with this FCA loophole, they may be losing a considerable number of customers now that this scandal is out in the open.

No one wants to do business with a company that is going to find a loophole to cheat taxpayers out of money. It is “legalised theft” as one of the members of the Treasury Select Committee puts it and the bank has become “an unacceptable face” within the banking industry.

What the Lloyds Banking Group was legal and the loophole within the FCA handbook allows them to proceed with the redress. However, there are still customers who have found that the bank is handling things incorrectly, especially when a third of the bank is owned by taxpayers. Since the bank is only dealing with 11 percent, a relatively small percentage, many feel that the bank should just spend the extra money to provide people with what they want – a refund, not a redress. The only way to (potentially) get this handled is to turn to the ombudsman service as a third party to interfere with the negotiations and ultimate payout.

LLOYDS Banking Group has denied claims that it underpaid compensation to customers who were mis-sold payment protection insurance (PPI).

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Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.