Bank customers to recoup billions as lenders finally admit mis-selling

Published on Monday 9 May 2011 17:25

MILLIONS of customers who have wrongly been sold insurance when taking out a bank loan will between them receive billions of pounds in compensation - after the body representing the UK's financial institutions said it would not appeal a legal ruling.

The announcement by the British Bankers' Association (BBA) to accept the High Court's decision that new Financial Services Authority (FSA) rules on the mis-selling of payment protection insurance (PPI) could be applied retrospectively, will leave financial institutions saddled with huge bills.

PPI is designed to protect borrowers in the event of a situation where they may not be able to work and continue to meet their repayments - for example, if they suffer an accident, sickness, or redundancy.

But it was found that people who would not be eligible for the insurance cover - such as those who are already unemployed, self-employed or have existing medical conditions - were also being encouraged to purchase the product, costing them hundreds of pounds.

The BBA's decision comes just days after Bank of Scotland owner Lloyds Banking Group was the first institution to say it would not appeal any compensation claims regardless of the BBA's decision - and earmarked 3.2 billion of its funds to pay out to customers. Other banks yesterday said they were setting aside millions of pounds to meet the potential pay-outs.

It is thought the total amount of compensation to be paid out could run as high as 8bn, based on the amount the banks have set aside - although the FSA estimate is more conservative, at about 4.5bn.

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"This is an important step for all UK banks in our efforts to restore the confidence and trust of consumers," said the BBA. "In the interest of providing certainty for their customers, the banks and the BBA have decided that they do not intend to appeal.

"We continue to believe that there are matters of important principle which we will be taking forward in other ways with the authorities."

Consumer groups yesterday welcomed the decision. "This was a shocking case where the mis-selling was taking place on an extraordinary scale," said Marieke Dwarshuis, director of Consumer Focus Scotland.

"The entire episode is an embarrassment for our high street banks. It is good news for the consumers who were sold policies that they could never have actually claimed on, that the banks have finally agreed to end their action and begin to put things right. There cannot be any more delays.

"Going forward, the message must be that products sold to consumers need to be right for their needs and straight-forward enough for them to be easily understood."

Peter Vicary-Smith, chief executive of Which? added: "We're delighted that the BBA has at last seen sense. Hopefully this will be a watershed moment in how banks treat their customers.

"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."Edinburgh-based Royal Bank of Scotland said it was "in discussions" with the FSA to clarify its requirements and the implications for its customers and shareholders. It has not yet revealed how much it will put aside to pay the compensation, but it is thought to be about 1bn.

Stefan Maryniak, personal finance expert at uSwitch.com, said it was the decision of Lloyds's that had acted as a catalyst for the industry. "Following Barclays' move to join Lloyds in withdrawing from the appeal process, it was only a matter of time before the banking industry as a whole backed down and admitted defeat," he said.

"By retreating from the battle, the banks have admitted they were wrong in this mis-selling scandal."