On 20 April, the High Court rejected claims made by the British Bankers’ Association (“the BBA”) against the Financial Services Authority (“the FSA”) and the Financial Ombudsman Service in relation to how payment protection insurance (“PPI”) should be sold.
Brian Evans, head of Dispute Resolution at Lanyon Bowdler, reflects on what this means for consumers. He says “PPI policies are designed to cover loan or credit card payments if the borrower suffers an accident, sickness, or unemployment. If sold properly, those policies can be very beneficial. However, in large numbers of cases, they were mis-sold. For example, the borrower may not have been told the policy was optional, or it may turn out to be worthless, because the borrower had pre-existing medical problems which invalidated the sickness cover, or was self-employed so the unemployment cover was not effective. Often, these policies were paid for with a single premium rolled up into the loan, so the borrower has, without realising it, paid interest on the amount of the premium as well as the loan”.
The Financial Ombudsman Service reports that in the last 12 months it has received more than 100,000 PPI mis-selling complaints (half its workload).
In August 2010, the FSA, which regulates PPI providers, issued a policy statement giving guidance on how PPI complaints should be dealt with. If firms found the same shortcomings cropping up repeatedly in the way they sold PPI, they would need to consider contacting people who had not complained, giving them the chance to claim.
The BBA challenged the FSA statement in court. They argued that the principles the FSA laid down were different to the guidance which firms had to follow at the time and that it was not right to penalise firms for not following those principles. Because the FSA can make firms set up a “consumer redress scheme” under part of the Financial Services and Markets Act, but has not done so, it could not ask firms to consider contacting people who had not complained, said the BBA.
Brian Evans says “So what does the fact the court rejected these arguments mean for people who have complaints? In the short term, perhaps not a great deal. The BBA has till 11th May to decide whether to appeal, and it may well do so. Until any appeal has been dealt with, many banks and lenders are still putting new PPI complaints on hold. We’ve been contacted by one high street bank saying that that remains their position. In the longer term though, if the judgment is upheld on appeal, it will mean that many banks and lenders will have to contact past PPI customers. In the court case, it was recorded that there are probably between 3.8-11.3 million people who might have a claim, and about 15 million people who the banks and lenders would need to consider writing to. Overall compensation could be as much as £3.2 billion, with administration costs to banks and lenders of up to £1.3 billion on top”.