Legal eagles hover, ready to pick banks' bones on PPI

Claims experts are cashing in as policyholders seek redress in the latest mis-selling scandal – payment protection insurance. Julian Knight reports

For good or ill, litigation has become a part of the British way of life. It started with law firms offering to win compensation for people involved in accidents. They operated on a no-win, no-fee basis and tempted consumers with catchy advertising slogans such as "where there's blame, there's a claim".

It was probably inevitable, over time, and considering the financial-services industry's habitual mis-selling, that some law firms would turn to representing people who had been wronged by Britain's banks and insurers.

First, just after the millennium, the legal firms started to offer to bring cases for people who thought they had been mis-sold endowment policies and personal pensions in the 1980s and 1990s. The firms would take the details of the claim from the consumer and then approach the insurer and ask for compensation. If the claim was rejected, they would then move on to the Financial Ombudsman Service (FOS).

More recently, as the public furore over punitive bank charges increased, these same firms started to offer to take up the cases of consumers who had been penalised for going into the red. But with potentially hundreds of millions at stake and the banks and the Office of Fair Trading locked in a high-court battle over the legitimacy of bank charges, the Financial Services Authority (FSA) has ordered that all consumer claims for a refund be put on ice for the time being.

So the legal firms have moved on, this time to the mis-selling scandal of the moment – payment protection insurance. PPI offers to pay out if a policyholder becomes unable to work, through illness or redundancy, and cannot pay off a mortgage, a loan or a credit card. It is a big moneyspinner for the banks and insurers, worth an estimated £5.5bn a year. But it has long attracted the fire of consumer groups who claim that the insurance is massively overpriced and is full of get-out clauses so that the provider doesn't have to pay out even if a policyholder is ill or has been made redundant.

The FSA seems to concur that PPI has its flaws, as it has fined a host of providers for mis-selling. The most recent and biggest fine was handed out a few weeks ago to Alliance & Leicester. The bank was fined £7m for the potential mis-selling of PPI over a period of nearly three years.

No wonder the legal eagles are hovering, ready to pick the bones of the banks.

"Millions of people have been systematically mis-sold these policies and they deserve their premiums refunded," said Andy Humphries, managing director of Renaissance Easy Claims, a claims management firm.

Mr Humphries's figure on the number of people mis-sold PPI is probably not as fanciful as it first seems. Alliance & Leicester, following the FSA fine, is currently writing to 211,000 loan customers who bought PPI from it between January 2005 and December 2007, informing them of how to make a complaint if they feel they have been mis-sold.

"Some of the instances of mis-selling are quite blatant," said Dan Hayes, a solicitor specialising in PPI for Keypoint Legal Services. "Retired people who are too old to claim on the policy and do not need it as they are on a pension income have been sold these policies. Another common abuse is mis-selling to self-employed people who are not allowed to claim for redundancy under the terms of the contract."

But these "no-win, no-fee" firms aren't taking on the banks out of the goodness of their heart, there is, of course, a fee to pay.

"We charge 25 per cent plus VAT – paid out of the compensation won – which is pretty typical," Mr Humphries said. "We don't pretend that you can't complain to the firm yourself and, even if they reject it, then go to the Financial Ombudsman Service. However, it's a lot of hassle, and time consuming, and people have busy lives. It's the same as employing a handyman to do your painting and decorating; sure, you can do it yourself, but you can save time and have a better job done by getting someone in."

Mr Hayes added that using a legal firm to pursue a PPI mis-selling claim can also help overcome some of the tactics employed by the banks and insurers to put claimants off.

"Rejection letters [issued by banks and insurers once a compensation claim is investigated] will give lots of what, to the untrained eye, look like plausible reasons for turning down a claim. However, we can spot these bogus excuses and will pursue the claim. If we believe in a claim we will pursue it to the FOS and if we have no luck there we can even appeal the FOS decision on our customer's behalf," Mr Hayes said.

But the FOS is becoming inundated with claims as banks and insurers choose to reject initial approaches for compensation. "We are encountering huge delays with the FOS at present. Some cases are taking up to 10 months to resolve as the banks and insurers drag their feet," Mr Humphries said.

On the other hand, though, Alliance & Leicester said that the increasing involvement of claims companies is causing delays and confusion. "These companies often use template letters which may not properly reflect the issues customers who are making the complaint actually have. This means we have to write back for more details, which holds the process up," said Steve Gracey from Alliance & Leicester.

"Anyway, we have systems in place to deal with mis-selling claims; which customers can easily access on their own. It confuses the process if third parties get involved," he said.

Banks and insurers in general have long had a strained relationship with claim management firms. Anthony Frost of Abbey said: "My thoughts are that people can do this for themselves. If they think they have been mis-sold they should approach the bank or insurer in question. If you are paid compensation, they will take between 30 and 40 per cent of what you win for doing, often, very little."

Mr Frost added that when he used to work at Prudential, the insurer, it took a decision to no longer deal with claim management firms which were chasing compensation over endowment mis-selling: "A firm line was taken not to deal with these companies, customers don't need to go to them," he said.

Stuart Glendinning, from the price comparison website moneysupermarket.com, said that the advent of PPI mis-selling claims management may encourage frivolous claims: "The worry I have is that some of these firms will want everyone who approaches them to complain, regardless of the circumstances of the case." In response, the claim management firms say that they vet their clients carefully and do not pursue bogus or frivolous claims.

Mr Glendinning is also concerned that some policyholders could be dispensing with insurance just when they need it most.

"People thinking about complaining need to ask themselves – is this a good time to do without insurance in case of unemployment? We are in a recession and people will lose their jobs as a result," Mr Glendinning said. "I have already heard of instances where people have had their PPI refunded and then gone on to lose their jobs soon after."