Big PPI ruling due today

20th April 2011  

(In an update to this story, the BBA has lost the case, but could appeal. Read the BBC’s comment on the ruling. You can also read the full wording of the Judgement here by Mr Justice Ouselely.)

It’s a big day for the largest misselling scam yet uncovered in the UK financial services industry. The Financial Services Authority (FSA) is being defied in the High Court over its ruling for compensation for the wanton misselling of Payment Protection Insurance (PPI). A Judicial Review of the case was undertaken in January, and the final ruling is due out today, Wednesday. (Read our comprehensive PPI Mis-selling Guide)

Payment protection insurance is supposed to offer protection to consumers who took out credit card agreements and loans and who subsequently couldn’t keep up the payments due to illness or redundancy. However even the banks now accept that millions of people were missold PPI. Often consumers ended up with expensive policies they didn’t need, could never have claimed on and in some cases, didn’t even realise they had.

Many consumers have said they felt pressured to take out PPI because they thought they may not get the loan or credit card they needed if they didn’t agree to it.

The nub of the current stand-off is due to the FSA bringing in some new banking industry rules in August 2010 that although weren’t brought in to deal with PPI specifically, do effect the PPI rip off.

These rules, which came into force in December, mean that the banks and credit card companies involved in the misselling swindle would have to re-examine all past PPI sales, even ones where the customer involved had not so far complained of misselling.

It’s this review of old files that’s set to land the banks, credit card companies and other financial institutions with a huge bill. If on reopening old cases it’s seen that PPI was missold, the institution involved would have to pay back the old payment protection insurance premium, plus interest and potentially compensation as well. Nearly 3 million people, 5% of the UK population are could be affected by the results of the review. If the FSA’s position is upheld, they may be due some £4.5 billion in compensation.

The British Bankers Association (BBA) on behalf of the banks and credit card companies are challenging the FSA’s new rules. A spokesman said:

“The FSA is trying to impose new standards on past sales.”

This was rejected immediately by the FSA who said:

“These principles have been in place for a very long time and are nothing new.”

The BBA is using a similar line in challenging the way the Financial Ombudsman Service (FOS) deals with PPI complaints that it in turn receives from discontented bank customers.

Whilst the two heavyweights have been slugging it out in court running up some of the biggest legal bills in history, tens of thousands of fresh PPI complainants have had their cases put on hold pending the outcome of the judicial review. Of the over 97,000 new complaints made to the FOS in the latter half of last year over 50% were regarding PPI.

This huge number of complaints, and according to the FOS, the repeated refusal of the banks and credit card companies to engage with the consumers affected, is what led to the FSA’s initial action in the first place. The Competition Commission is in the process of rewriting the rules to prevent banks and credit card issuers from selling PPI polices at the point where they agree to grant a loan or issue a credit card.

The BBA’s defence counsel Lord Pannick QC states that if the ruling goes against the FSA and the FOS, some 35 insurance companies could fail with the resulting compensation claims falling on the Financial Services Compensation Scheme.

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