Around 23 years ago, I embarked on a course of action that hurt the UK’s biggest lenders. My actions from 2003 onwards led to companies paying £53.5bn in compensation to British borrowers. Here’s my story, together with a warning for owners of Lloyds Banking Group (LSE: LLOY) shares and other financial stocks.
‘The world’s biggest whistle-blower’
From 1991 to 2002, I worked for various providers of payment protection insurance (PPI). PPI is sold to borrowers alongside credit and store cards, mortgages, motor finance, personal loans, and other financial contracts. It pays out if/when policyholders are unable to work due to accidents, sickness, or unemployment (or on death).
As an industry insider for 11 years, I knew that these policies were massively overpriced, poorly designed, usually mis-sold, and difficult to claim against. I also knew that PPI providers made maybe £5bn a year from selling them. Hence, in 2003, I went on the warpath.
Beginning with a (long gone) Fool article in March 2003, “The Perils Of Payment Protection Insurance”, I revealed the nastiest tricks of the PPI trade. I kept up this consumer crusade for over a decade. Eventually, regulators and other authorities took notice and then action. This Fool article from December 2008 records my journey.
My offensive against PPI led to me being labelled as ‘the world’s biggest whistle-blower’. However, this campaign would never have succeeded without the immense support provided to ripped-off PPI buyers by my famous friend Martin Lewis of MoneySavingExpert.com. Martin’s efforts directly generated millions of successful refunds, so he deserves the lion’s share of the credit.
The next big mis-selling scandal?
Now there’s a new worry for shareholders in Lloyds and other major lenders. Another mis-selling affair is working its way through the courts, this time concerning motor-finance agreements.
Before 2021, motor finance providers allowed car dealers to add hidden ‘discretionary commission arrangements’ (DCAs) — paid for by higher interest rates — to financing. The practice was banned in 2021. In October 2024, the Court of Appeal ruled that such hidden commissions were unlawful without full disclosure and informed consent.
Test cases are now before our Supreme Court, with a final ruling expected this summer. Meanwhile, Lloyds — which owns the UK’s biggest car-finance provider (Black Horse) — suspended dealer commissions for new motor finance. Also, HM Treasury and the Financial Conduct Authority have both weighed into this dispute, worried about potential damage to British banks.
If the Supreme Court rules in favour of borrowers, the total compensation bill might reach £44bn. In other words, it may be a body blow on par with the PPI scandal. That damaged bank shares, but it’s unclear by how much, as the great financial crisis of 2007-09 caused so much destruction of its own.
My family portfolio has owned Lloyds shares since mid-2022. Currently, they trade at 76.92p, which is close to its five-year high and values this FTSE 100 firm at £46bn. Trading on 12.4 times earnings and offering a dividend yield of 4.1% a year, they don’t look expensive to me.
That said, if the Supreme Court judgment comes down in favour of borrowers, then Lloyds might have to pay billions more in claims. I suspect this would smash its share price, at least for a while. At any rate, I will be closely watching this space!
