Banking industry gives up on PPI mis-selling battle

The banking industry has abandoned a legal fight over the mis-selling of payment protection insurance (PPI).

The British Bankers' Association, which fought the case, said it would not appeal after losing a court challenge against new rules on mis-selling.

Barclays said it had set aside £1bn to pay compensation, and HSBC £269m, while RBS added £850m to the £200m it had already paid or provided for.

Last week, Lloyds Banking Group made a £3.2bn provision for possible claims.

Peter Vicary-Smith of the consumers' association Which? said the banks had now seen sense.

"It was a colossal error of judgment by the BBA to have brought this case in the first place, which has even further diminished the banking industry's reputation in the eyes of consumers," he said.

"PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade.

"There could still be huge numbers of people out there who were duped into buying PPI and unaware they can make a claim," Mr Vicary-Smith added.

Mis-sold

The banks' decisions mean that several million people may now be eligible for a compensation payment.

PPI policies are supposed to cover loan repayments if someone falls ill, has an accident or loses their job.

But 16 million have been sold since 2005 alone and many are thought to have been mis-sold.

In some cases they were sold to self-employed people who would not have been able to claim, to borrowers who were wrongly told that taking PPI was a condition for being granted their loan, and even to consumers who did not realise they were taking out a policy.

Last month the High Court ruled that the banks had to obey the new rules of the Financial Services Authority (FSA), which require them to go back over all their past sales to see if the customers have a claim for mis-selling.

'Important step'

In a statement the BBA said: "In the interest of providing certainty for their customers, the banks and the British Bankers' Association have decided that they do not intend to appeal."

RBS confirmed on Monday that it would also be addressing customers' complaints, and in a further statement put the total expected loss at over £1bn.

"Although the costs of PPI redress and its administration are subject to a degree of uncertainty, RBS will record an additional provision of £850m in the second quarter of 2011," the bank said.

"To date, RBS has paid compensation to customers of [about] £100m, and has an existing provision of [about] £100m."

Adam Scorer, of Consumer Focus said the banks should ensure users received their money "quickly and efficiently."

"The entire episode is an embarrassment for our High Street banks - it is now time to wipe the slate clean, pay up and look to learn lessons for the future," he said.

"Refunding billions of pounds to millions of people will be a mammoth undertaking and to get it wrong would add insult to injury."

'We apologise'

Barclays' chief executive Bob Diamond said the bank would now begin the process of compensating customers.

"We don't always get things right: when we get them wrong, we apologise and put them right.

"We have taken this decision because it is in the best interests of our customers, as well as for Barclays and its shareholders," Mr Diamond said.

The Financial Ombudsman Service (FOS) welcomed the banks' decision to deal with the mis-selling.

"Consumers should come to us at the ombudsman if they're unsure about what to do next," said chief ombudsman Natalie Ceeney.

"Meanwhile we will be working with the banks, over the coming weeks, to ensure that consumers' complaints are dealt with fairly and promptly."

Better record

One leading mortgage lender, the Nationwide building society, distanced itself from the banks that tried to challenge the FSA.

It said it had continued to process new PPI complaints while the High Court case was being heard.

It pointed out it expected to pay only £10m in compensation and had a much better record of dealing with such complaints.

"Looking at the FOS complaints league table (for the second half of 2010) the society is ranked 102 out of 106 firms based on fewer than 650 complaints," said a spokesman for the society.

"Thirteen per cent of the society's complaints were upheld by FOS in favour of the customer, compared to an industry average of 63%."

FSA scrutiny

The FSA has previously estimated that the banks will have to pay up to £4.5bn to settle tens of thousands of claims.

That now appears to be an underestimate.

The regulator requires the banks and other PPI sellers to look at all past sales and, if there is any evidence of "systemic" mis-selling, to write to the affected groups of customers and invite them to make a claim.

This means that not all past customers will be contacted directly, as not all policies were mis-sold in the first place.

However, any customer who has a concern is encouraged to lodge a complaint first rather than wait for the bank to take the initiative.

An FSA spokesman explained that the regulator employs teams of supervisors for each individual institution, and also has a special team looking at just the PPI problem, which would ensure that the banks and other sellers of PPI did not dodge their responsibilities.

Although the FSA can only enforce its rules on sales made after January 2005, when it took over regulation of PPI sales, customers can still complain to a bank about sales before then.