Barclays 2014 Annual Report Download - page 306

304 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Notes to the financial statements
Accruals, provisions, contingent liabilities and legal proceedings
27 Provisions continued
Onerous contracts
Onerous contract provisions comprise an estimate of the costs involved with fulfilling the terms and conditions of contracts where the liability is
higher than the amount of economic benefit to be received. The additions of £152m mainly relate to leases on properties that have been vacated
in the Investment Bank and PCB during the year.
Redundancy and restructuring
These provisions comprise the estimated cost of restructuring, including redundancy costs where an obligation exists. Additions made during the
year relate to formal restructuring plans and have either been utilised, or reversed, where total costs are now expected to be lower than the
original provision amount.
Undrawn contractually committed facilities and guarantees
Provisions are made if it is probable that a facility will be drawn and the resulting asset is expected to have a realisable value that is less than the
amount advanced. The decrease in these provisions is primarily due to the Spanish business being classified as a disposal group held for sale.
Customer redress
Customer redress provisions comprise the estimated cost of making redress payments to customers, clients and counterparties for losses or
damages associated with inappropriate judgement in the execution of our business activities. Customer redress largely relates to Payment
Protection Insurance and interest rate hedging products but also includes, within ‘Other customer redress’, smaller provisions across the retail and
corporate businesses which are likely to be utilised within the next 18 months.
Sundry provisions
This category includes provisions that do not fit into any of the other categories, such as fraud losses and dilapidation provisions.
Critical accounting estimates and judgements
Payment Protection Insurance Redress
As at 31 December 2014 Barclays had recognised cumulative provisions totalling £5,220m against the cost of Payment Protection Insurance (PPI)
redress and associated processing costs with utilisation of £4,161m leaving a residual provision of £1,059m.
Through to 31 December 2014, 1.3m (2013: 1.0m) customer initiated claims had been received and processed. The volume of claims received in
2014 declined 14% compared to 2013 and 62% since the peak in May 2012. This rate of decline however was slower than previously expected,
with increased levels of claims from Claims Management Companies in particular.
Barclays are committed to delivering the right customer outcomes and as such re-review cases to ensure all cases are consistently treated in line
with current policy. During 2014 half of all relevant cases have been re-reviewed.
As a result of the lower than expected decline in claims and the outcome of re-review activity, additional provisions totalling £1,270m have been
recognised during 2014.
The provision is calculated using a number of key assumptions which continue to involve significant management judgement and modelling:
Q Customer initiated claim volumes – claims received but not yet processed and an estimate of future claims initiated by customers where the
volume is anticipated to decline over time
Q Proactive response rate – volume of claims in response to proactive mailing
Q Uphold rate – the percentage of claims that are upheld as being valid upon review
Q Average claim redress – the expected average payment to customers for upheld claims based on the type and age of the policy/policies.
These assumptions remain subjective, in particular due to the uncertainty associated with future claims levels, which include complaints driven by
CMC activity. The current provision represents Barclays’ revised best estimate of all future expected costs of PPI redress, however, it is possible that
the eventual outcome may differ from the current estimate. If this were to be material, the provision would be increased or decreased accordingly.
The current forecast indicates that the large majority of costs included in the provision will be incurred during 2015 and 2016.
The following table details, by key assumption, actual data through to 31 December 2014, forecast assumptions used in the provision calculation
and a sensitivity analysis illustrating the impact on the provision if the future expected assumptions prove too high or too low.
Assumption
Cumulative
actual to
31.12.14
Future
expected
Sensitivity analysis
increase/decrease
in provision
Cumulative
actual to
31.12.13
Customer initiated claims received and processeda1,300k 220k 50k = £99m 970K
Proactive mailing 680k 320k 50k = £14m 660K
Response rate to proactive mailing 28% 23% 1% = £6m 26%
Average uphold rate per claimb79% 87% 1% = £5m 74%
Average redress per valid claimc£1,740 £1,745 £100 = £28m £1,763
Notes
a Total claims received to date excluding those for which no PPI policy exists and excluding responses to proactive mailing. The sensitivity for the cost of Customer Initiated Claims
includes the associated cost of Financial Ombudsman Service (FOS) referrals and operating costs.
b Average uphold rate per claim excluding those for which no PPI policy exists.
c Average redress stated on a per policy basis.