The banks have recently lost a High Court challenge to new rules issued by the Financial Services Authority (FSA) regarding the approach to compensating those who have been mis-sold Payment Protection Insurance (PPI).
PPI was commonly sold alongside personal loans in the last decade, and is designed to protect the borrower in the event that their income suddenly falls, for example through unemployment or illness. Many cases have arisen, however, in which PPI was found to have been mis-sold. Examples of PPI being mis-sold include where it was added to the cost of the loan without the borrower being aware of it, or where there were no circumstances in which the borrower would have been entitled to claim under the policy (e.g. where the borrower was retired or self-employed). In such cases, borrowers will be entitled to a refund of their premiums, plus interest.
Recently, the British Bankers' Association (BBA) sought a judicial review of guidance issued by the FSA and the Financial Ombudsman Service (FOS). The BBA argued that guidance requiring banks to contact customers who have potentially been mis-sold PPI, even if they have not raised a complaint, set a 'dangerous precedent' as it was effectively applying new rules to past sales.
However, the High Court rejected the BBA's challenge, confirming that the FOS's approach to PPI claims is correct. The BBA has announced that it has decided not to appeal the decision.
In the past, banks have made large profits from PPI – it is estimated that for every £100 of premiums paid, only £15 was paid out in claims. Over 1.5 million complaints have been made regarding PPI being mis-sold. In the past, the FOS has upheld approximately three-quarters of complaints. It is estimated that the High Court’s decision will leave the banks facing pay-outs totalling up to £4.5 billion.