Banks 'hiking their fees to pay for PPI compensation'

Banks were today accused of hiking interest rates and fees on credit cards and personal loans to make up for their huge compensation bills on payment protection insurance.

In a clear sign that consumer groups' celebrations over banks' capitulation on PPI were premature, credit card providers have implemented a spate of rate rises, apparently to claw back rising costs elsewhere.

During the past fortnight, since the powerful lobby group the British Bankers' Association was defeated at the High Court and banks were ordered to review all PPI policy sales, the average interest rate charged on credit cards hit its highest in 13 years.

Santander, whose total PPI payout is expected to be £400 million, raised the rate on its popular Zero credit card by 1% to 19.9%.

Bank of America-owned MBNA, the largest credit card lender in Europe which has put aside £397 million for PPI payouts, lifted the annual fees on its Virgin Atlantic credit card from £115 to £140, pushing its annual percentage rate up to 47.2%.

Capital One increased its annual fee from £18 to £30, raising the card's APR from 7% to 19.9%.

In the weeks before the PPI legal defeat, bailed-out bank Royal Bank of Scotland, which estimates it will have to pay up to £1 billion compensation, and its NatWest brand jacked up credit card interest rates by up to 5%.

"A few years ago, the big banks used to offer cheaper loans and make up for it by earnings from PPI policies, but now they can't do that as much they're looking to recoup more revenues from the loans," said Michelle Slade, of financial comparison site Moneyfacts.

"Rates across the whole of personal finance - credit cards, personal loans and overdraft rates - are all creeping up. We've seen this before.

Whenever banks lose revenue streams, rates always go up elsewhere to make up for it. They were never going to take the PPI ruling lying down. I think
we'll see far more rates rising off the back of this, which will be heightened when the Bank of England raises interest rates."

Analysts added personal loans had become more expensive in recent weeks, although the biggest firms, including Nationwide, NatWest and Lloyds Banking Group, do not publish their rates, preferring so-called "personal pricing" for individual applicants. Alliance & Leicester, owned by Santander, raised the interest on its £5000 loan by 0.3% to 8.6%.

Banks disputed the rises were related to the PPI ruling. A Santander spokesman said: "We carry out routine reviews on every product. The
two things [price rises and PPI] are unrelated."