Call for accelerated compensation for mis-sold payment protection insurance after major players abandon legal challenge that had stalled claims of millions of customers
The Financial Services Authority instructed high-street banks to accelerate compensation payments for mis-sold payment protection insurance (PPI) after the major players abandoned a legal challenge that had stalled claims of millions of customers.
With PPI poised to become one of the UK's biggest mis-selling scandals, the City regulator told the banks to "get on" with handling complaints after their decision not to pursue court action against FSA rules that were imposed on past sales.
"Today signals the end of years of poor PPI complaint handling and will trigger a dramatic improvement in the way customers are treated when making complaints," the FSA said as Barclays, HSBC and Royal Bank of Scotland backed away from the legal case orchestrated by the British Bankers' Association.
The industry has already been put on notice by the FSA that it faces fines and enforcement action if customer complaints are not handled quickly after the Financial Ombudsman Service, which deals with complaints thrown out by banks, started to receive 5,000 a week.
The bailed-out RBS was the last of the three banks to admit it would take a £850m provision after Barclays began a day of capitulations saying it would set aside a £1bn to cover its estimated bill. HSBC admitted the cost of PPI also would knock profits at HSBC 14% lower to $4.9bn (£3bn) after it took a lower than expected $440m charge to cover potential claims.
The major players were following Lloyds Banking Group, which stunned the City last week by putting £3.2bn aside to cover compensation claims relating to PPI. The bank is now in the process of hiring hundreds of staff to help process claims for PPI, which was supposed to pay out when customers lost their jobs or fell ill.
On a day heralded by the consumer group Which? as a "watershed moment in how banks treat their customers", Barclays chief executive, Bob Diamond, indicated he was prepared to apologise to customers. "We don't always get things right for our customers; when we get them wrong, we apologise and put them right. That's our commitment to our customers, and it applies to the way in which we will deal with PPI complaints," he said.
Stuart Gulliver, the new chief executive of HSBC, pointed out the bank had stopped selling PPI in 2007 – others carried on until last year – to explain the lower than expected charge, which he stressed, was not because the bank intended to be "hard-arsed" about potential claims.
RBS described the industry-wide U-turn as "an important step for all UK banks in our efforts to restore the confidence and trust of consumers" after it revealed it had paid out £100m in compensation and had another £100m set aside even before the extra £850m announced yesterday.
PPI, which was sold alongside financial products often without customers' knowledge and rarely paid out, is one of the costliest mistakes for the industry, which handed out £13bn in compensation for pension mis-selling and at least £2.7bn for the endowment scandal. The FSA estimated in August 2010 that the redress would cost £4.5bn but analysts now reckon the bill could reach £9bn.
The statutory organisation Consumer Focus called PPI "an embarrassment for our high-street banks". "PPI highlights that people find it difficult to understand every day financial products," said Adam Scorer, head of external affairs at Consumer Focus, which joined other groups in urging banks to pay out claims quickly.
Gillian Guy, chief executive of Citizens Advice, said: "It's now up to the banks to deal with claims quickly and thoroughly. The onus should be on them to contact all those affected rather than wait for customers to make a claim."
Since the FSA started regulating PPI in 2005 the industry has received 1.5m complaints, although another 1.5m customers are thought to be unaware they have been mis-sold policies.
The BBA had until Tuesday to ask for leave to appeal against an April high court ruling that had upheld the FSA's decision to impose its new sales on rules on products sold in the past. The BBA said it would not proceed after talks with the banks. "In the interest of providing certainty for their customers, the banks and the BBA have decided that they do not intend to appeal," the BBA said. But, it added: "We continue to believe that there are matters of important principle which we will be taking forward in other ways with the authorities."