FSA wins PPI battle in high court

Britain's banks will be forced to re-open thousands of claims over the mis-selling of payment protection insurance (PPI) and pay up to £4.5bn in compensation following a high court ruling.

PPI is insurance typically sold to consumers at the point of sale of personal loans, credit cards and other forms of debt, which is designed to meet their repayments in the event of accident, sickness or unemployment. Many customers have discovered after paying for PPI policies that they would never qualify for a payout due to exclusions in the terms and conditions, while others didn't even realise they had signed up to buy the insurance.

In December the Financial Services Authority introduced rules to stop mis-selling, which required providers to talk customers through the key features of a policy rather than assuming they will read any relevant documentation, and make it clear that the cover is optional.

But the banks, represented by trade body the British Bankers' Association, compained that the rules were unfair because they would be applied retrospectively. In January the BBA launched a high court challenge against the FSA and the Financial Ombudsman – but today's ruling found against them. They could now face a bill of up to £4.5bn – £1.3bn for new complaints received during the coming five years and up to £3.2bn as a result of reviewing previous PPI sales.

The high court judgment endorsed the approach taken by the ombudsman and the FSA, and the banks now have 21 days to appeal.

Several banks had put PPI complaints on hold until the outcome of the judicial review was known. However, the FSA made it clear they should still be dealing with complaints, and anyone whose bank has not dealt with their complaint within eight weeks is entitled to take it to the Financial Ombudsman Service.

The ombudsman service said the lack of cooperation from some financial businesses has made it difficult to progress PPI cases over this period. "However, the clear-cut judgment means that banks and other financial businesses should now be in the position to deal promptly, efficiently and fairly with their customers' PPI complaints," a statement said.

Natalie Ceeney, chief ombudsman, added: "This judgment is very clear-cut and confirms that the ombudsman's approach to PPI complaints is right. People have been waiting a long time while the banks' legal action has been ongoing. I would now like to see financial businesses showing real commitment to sorting out their customers' complaints efficiently and promptly."

A spokesman for the BBA said: "We are disappointed with today's judgment and now need to consider the details of it very carefully, as well as next steps including whether it would be appropriate to apply for permission to appeal."

He continued: "Any complaints that are directly affected by the judicial review, and therefore can not be decided, will continue to be placed on hold until the next steps have been decided. We will continue to work closely with the FSA to ensure that all complaints are appropriately handled and customers are not disadvantaged. Customers who are considering making a complaint or who have a specific query about an existing complaint should contact their bank in the first instance."

Ash Saluja of law firm CMS Cameron McKenna said the ruling highlighted serious defects in the regulatory system that the government needs to address. "The compensation regime is Kafkaesque, and the role of the ombudsman as a retrospective standard setter is not an appropriate basis for dealing with multi-billion-pound compensation. The banks are right to object – we should not have a rulebook to which backdated rules can effectively be added in order to justify compensation."

'A huge victory for consumers'

The ombudsman has dealt with more than 200,000 PPI cases and continues to handle large volumes of complaints. Since the BBA launched its legal challenge in October 2010 it has been receiving up to 5,000 PPI complaints a week, while complaints to the FSA surged by 63% between the first and second half of 2010 from 266,685 to 434,596.

The ombudsman has found in favour of consumers in three out of four cases so far – a far higher proportion in relation to some financial businesses.

Which? chief executive Peter Vicary-Smith said the ruling was "a huge victory for consumers". He added: "If the banks paid redress to every consumer who had been mis-sold PPI they would be looking at a possible £3bn bill. Instead of dealing with mis-selling they are trying to wriggle out of paying up using the courts – this now has to stop.

"The banks need to admit defeat, stop outsourcing their complaints handling to the ombudsman and finally do the right thing by their customers."

Martin Lewis of MoneySavingExpert.com said: "The banks have behaved abominably. They've deliberately mis-led reclaimers by telling them everything is on hold and used the memory of the bank charges hold to make it seem legitimate.

"The hold has not been agreed by the FSA or the ombudsman, who have both lambasted it, and has potentially left hundreds of thousands of people – each trying to reclaim thousands of pounds – wrongly in limbo and the ombudsman over-stretched.

"If this goes to appeal, as expected, they cannot be allowed to continue. I believe they should be fined for the way they have tried to manipulate the system to consumers' detriment.

"It is time we had a system of collective consumer redress. The fact the banks can deliberately reject claims to put people off taking it further, even though the vast majority who go to the ombudsman win, is against natural justice and needs to stop."

Andrew Hagger of Moneynet said: "This case has dragged on far too long and has cast a negative shadow over UK high street lenders, particularly in the way they have treated their customers. Let's hope that those who are due compensation aren't made to wait much longer and that for both sides a line can be drawn under this debacle, once and for all."