Barclays increases provision for PPI mis-selling by £700m

Barclays has now increased its original £1bn provision for PPI compensation twice. Photograph: Dominic Lipinski/PA

The scale of the payment protection insurance mis-selling scandal was ratcheted up again on Thursday when Barclays set aside another £700m to cover the cost of claims, taking its bill to £2bn.

The decision by Barclays, under new chief executive Antony Jenkins, to announce the increased provision in an unscheduled statement sparked speculation that rival banks would also need to increase their provisions.

The additional £700m is likely to result in Barclays reporting a loss for the third quarter, figures for which will be released on 31 October. The bank also admitted that it may need to put yet more money aside in the future.

Selling PPI – which is designed to cover repayments for customers if they fall sick or lose their jobs – alongside loans proved very profitable for the banking industry. But it is now being shown to have been a very costly exercise, with all the major banks making huge provisions for mis-selling.

Barclays said it had "experienced higher than previously anticipated levels of PPI claim volumes since the end of the first half" on 30 June and had therefore decided to set more money aside.

It the third provision made by Barclays. The first £1bn was set aside last year and an extra £300m was added earlier this year.

"Based on claims experience to date and anticipated future volumes, the resulting provision includes Barclays' best estimate of expected costs of future PPI redress," the bank said. "Barclays will continue to monitor actual claims volumes and the assumptions underlying the calculation of its PPI provision."

In August, Barclays admitted that claims for PPI had risen to 280,000 in the first half of the year and Jenkins, who ran the retail bank before his promotion to chief executive, has committed the bank to lowering the number of complaints it receives. He previously ran Barclaycard, which was among the banks' business units selling PPI to customers.

The banking industry has complained that claims management companies, which make claims on behalf of customers for a fee, are clogging up the PPI redress process by putting in claims for customers who do not have policies. Lloyds, for instance, has employed 1,000 people to process PPI claims and reckons that 50% of complaints put in by customers are false.

Lloyds was the first bank to start making provisions for PPI mis-selling, breaking ranks with rivals who were trying to fight a decision by the Financial Services Authority to make them pay out to customers. Lloyds took a £3.2bn provision in May 2011, although this has now risen to £4.3bn. Royal Bank of Scotland's bill is £1.3bn, HSBC's £1.1bn and Santander – which did not take an additional provision in the first half – has made a £550m provision.

The total for the big five banks now stands at more than £9bn but other sellers of PPI are also taking provisions.

Ian Gordon, bank analyst at Investec, calculates that Lloyds is the bank now most likely to need to make an extra provision, on the basis that, like Barclays, it had paid out almost 70% of its existing provision for PPI. The proportions paid out by RBS and HSBC are not as high, which may make them less likely to increase their provisions.