The charges take Lloyds’ bill for mis-selling loan insurance to £13.4bn, more than any other bank, and overshadowed plans by the bank to return excess capital to shareholders through special dividends or share buybacks.
The mis-selling of payment protection insurance (PPI) by banks and other financial services companies is Britain’s most expensive consumer finance scandal and has cost banks and other financial services firms about £28bn.
It is one of a number of scandals, including the attempted rigging of benchmark interest and foreign exchange rates, which have undermined public trust in Britain’s banks.
Lloyds reported a first-half statutory profit of £1.2bn, up 38% from a year ago but well below analysts’ expectations because of the PPI charge.
Lloyds, which is Britain’s biggest retail bank said the charge was disappointing and reflected a higher-than-anticipated rate of complaints. It warned that if complaints remain at the same level, it will need to set aside a further £1bn at the end of the year and another £2bn next year.
Britain’s financial regulator said in January it was considering imposing a deadline on customers claiming compensation to potentially draw a line under the scandal.
Senior banking executives have said the payouts restrict their ability to lend to British households and businesses. They are also angered by the proportion of complaints, often by claims management firms, which are found to illegitimate.
“We think that a proper timeline done in a fair way would be a positive thing to do,” Lloyds chief executive Antonio Horta-Osorio told reporters.
The bank also set aside £435m for other misconduct issues, including £175m for complaints relating to packaged bank accounts and a £117m by the Financial Conduct Authority relating to aspects of its PPI complaint handling process.
The British government has cut its stake in Lloyds to less than 15% and British finance minister George Osborne plans to sell some of the remainder.