Banks face £4.5bn bill for PPI mis-selling after court defeat

Britain's high street banks face a £4.5 billion compensation bill after a legal challenge against new payment protection insurance (PPI) rules was thrown out by the High Court in London.

The British Bankers' Association (BBA) is now considering an appeal against a decision that is likely to pave the way for up to three million people to claim mis-selling redress from lenders including Lloyds Banking Group and Royal Bank of Scotland.

PPI is designed to cover loan repayments in the event of the policyholder being unable to work due to an accident, illness or unemployment. More than six million policies are sold each year but there has been a sharp rise since 2007 in complaints from policyholders claiming they were mis-sold the product.

Banks have rejected an average of six in ten of the 1.5 million complaints made about PPI since it came under the Financial Services Authority's (FSA's) remit in 2005, with some rejecting significantly more. Most complaints then taken to the Financial Ombudsman Service (FOS) have been upheld in the consumer's favour.

The FSA last year introduced new rules forcing banks to reopen PPI sales dating back to 2005 to identify cases of mis-selling. The regulations, which came into force in December, also require banks to talk customers through the key features of PPI and make it clear that the cover is optional.

The BBA claimed it was unfair to apply the rules retrospectively and launched a legal challenge against the reforms in October. Its defeat yesterday means the banks it represented in the case, including Lloyds, RBS, Barclays and HSBC, now face paying out an estimated 1.3bn in compensation for new complaints received over the next five years, plus 3.2bn arising from previous sales.

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."

It said any complaints affected by the judicial review would remain on hold until the next steps have been decided.

But the FSA yesterday warned the banks to continue dealing with complaints and let customers know they can refer their complaint to the FOS, or risk enforcement action.

The FOS has received up to 5,000 PPI complaints a week since the BBA launched its legal challenge last October.

Natalie Ceeney, chief ombudsman, said: "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."

Any appeal must be filed within 21 days and experts predict that the BBA will continue its challenge.But Peter Vicary-Smith, chief executive of consumer group Which?, called on the banks to accept the decision. "Instead of dealing with mis-selling, they're trying to wriggle out of paying up using the courts - this now has to stop," he said.

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