Hallelujah! This Could Be The End Of PPI Claims!

For investors in the banking sector, today’s release from the Financial Conduct Authority (FCA) is a very welcome piece of news. It states that the regulator is considering imposing a deadline on payment protection insurance (PPI) complaints which could come into effect as soon as spring 2018.

Clearly, today’s news is not a given: the FCA has stated that it will consult on the issue by the end of the year. And, while a 2018 deadline would be welcome, it could cause the number of complaints to rise somewhat as people either submit their grievance or else leave it be.

For the banking sector, though, it is a step in the right direction and it is likely that if a cut-off point were introduced, investor sentiment would pickup in anticipation of its introduction. That’s because setting aside provisions for PPI claims in recent years has severely hurt the profitability of all of the major UK banks and, with there being no end in sight, many investors have been put off investing in the sector for fear that profits will always be held back by large payouts.

Of course, having a deadline for PPI complaints may not be such a bad thing for consumers, either. With the FCA stating in today’s release that 74% of consumers have heard of PPI and 77% say they are aware of problems or issues with it, it seems unlikely that many consumers who have genuine claims will miss out on receiving redress.

And, with the FCA mulling over initiating a communications campaign to inform consumers of the potential to claim, it could be the case that in the next couple of years there is an increase in the number of claims. Moreover, the FCA believes that such a campaign could also encourage consumers to claim directly to the firm involved, rather than using claims management companies which take hefty commissions.

However, the real winners from a deadline would undoubtedly be shareholders in UK banks. Even if there is a rise in complaints prior to a potential 2018 deadline, the confidence which banks have to pay out profit as a dividend will undoubtedly increase and this should mean that payout ratios rise at a brisk pace. And, with the payout ratios of the likes of Lloyds, Barclays and RBS being well below the index average, their yields could rise significantly and cause investor sentiment to improve dramatically in the coming years.

Clearly, the end of major fines for banks is not yet over. Various allegations of foreign exchange rigging and money laundering are still holding back investor sentiment in the sector. However, PPI has thus far cost the banking industry over £20bn which otherwise could have been reinvested for further growth or paid out as dividends. If this were to come to an end within the next three years, buying banks now could be an even shrewder move than it already is.

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Peter Stephens owns shares of Barclays, Lloyds Banking Group, and Royal Bank of Scotland Group. 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.