Lloyds takes a $5.3-billion punch for selling dud insurance

Lloyds Banking Group Plc, 41 per cent owned by the British government since the credit bailout a couple of years ago, today said it has set aside £3.2 billion ($5.3 billion) to cover potential compensation for selling 'payment protection insurance' to people who would never be able to claim it.

The bank reported a £44-billion net loss in the first quarter of the year as a result, in addition to loan losses in crisis-hit Ireland and higher funding costs, leading some analysts to fear about its recovery prospects.

Lloyds made the provision against payment protection insurance (PPI) complaints after banks lost a UK court case on the way policies were sold to millions of customers.

The policies are designed to protect loan payments in the event of the borrower losing employment or being unable to work, but they were sold to self-employed and unemployed people who would not have been able to claim in any case.

A court ruled last month that the banks were at fault.

Banks have until 10 May to appeal the ruling, but Lloyds said it would not do so - a serious blow to any united defence by the banking industry, because it is the biggest PPI provider.