Three million customers due for payout over banks' PPI policy

Biggest financial product mis-selling scandal in history finally comes to a conclusion

Three million people are in line to receive more than £2,000 each, after high street banks surrendered in the long battle over mis-sold payment protection insurance.

Credit card and loan providers and the four main banks – Lloyds-HBOS, HSBC, Barclays and RBS – are expected to pay out up to £9bn compensation for PPI, making it the biggest mis-selling scandal in UK history.

The breakthrough came when the British Bankers Association (BBA) abandoned a legal challenge to new rules on dealing with PPI complaints, paving the way for financial providers to settle cases going back years.

Consumers who took out policies – costing up to £5,000 – are now being urged to pursue refunds and interest.

Payment protection insurance is supposed to cover borrowers for mortgage, loan and credit card payments if they become unemployed or ill but it is riddled with loopholes which mean many people can never claim.

The small print often bars claims for depression or backache – two of the most common forms of illness.

High-pressure tactics were used to sell the policies and many people were unaware one had been added to their loan cost. Adam Scorer of Consumer Focus said: "Finally the banks have agreed to face the music on the issue of PPI. The entire episode is an embarrassment for our high street banks.

"PPI highlights that people find it difficult to understand everyday financial products."

One-and-a-half million people have already complained about PPI, but thousands of claims were put on hold during the BBA's challenge to new Financial Services Authority rules requiring them to go back through their files and contact likely victims of mis-selling. A High Court judge rejected the challenge last month and the BBA had until today to appeal.

Lloyds Banking Group, the biggest PPI provider, last week announced it was pulling out of the case and setting aside £3.2bn for compensation.

Barclays followed suit yesterday, saying it expected its compensation to approach £1bn. Royal Bank of Scotland – controlled by the taxpayer – confirmed it would drop the legal action too, leaving it with a total estimated bill of just over £1bn.

HSBC, which stopped selling PPI four years ago, has set aside £270m for compensation.

The BBA had been contesting the FSA's imposing of new complaints handling rules on old cases, which it argued was retrospective regulation. Yesterday it said: "In the interest of providing certainty for their customers, the banks and the BBA have decided that they do not intend to appeal."

PPI has been a scandal for more than a decade, with concerns about it first being raised by consumer group Which? in 1998. Citizens Advice launched a super-complaint to the Office of Fair Trading about mis-selling and poor value in September 2005.

The Independent highlighted the brewing customer revolt in January 2008 with a front-page headline: "The banks' £4bn protection racket", a reference to the 80 per cent of the £5bn a year of PPI premiums kept by financial providers.

Although new PPI sales have slowed, the Financial Ombudsman Service receives around 5,000 new complaints about it each week. The free service upholds complaints in around three-quarters of cases, ordering financial providers to pay an average of £2,750.

The final bill for PPI could be double the FSA's initial estimate of £4.5bn.

High street banks have set aside or are likely to pay out £5.4bn. Credit card and specialist loan companies will be hit with heavy bills too.

New Competition Commission rules ending the sale of PPI alongside loans will come into force in October.

Consumer groups expressed delight at the BBA's climbdown. Martin Lewis, of Moneysavingexpert.com, said: "This is a wonderful day for consumers. For once the banks have done the right thing and backed down."

Peter Vicary-Smith, chief executive of Which?, said: "The BBA has at last seen sense. Hopefully this will be a watershed moment in how banks treat their customers. PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade."

Are you a victim?

Q I may have been mis-sold PPI. What should I do?



A It's possible that you were sold payment protection insurance when you took out a loan or credit card. Dig out the paperwork you were sent when you arranged the loan. If you can't find it, your lender will be able to tell you if you took out PPI.



Q I was sold PPI. Can I claim for compensation?



A It's quite likely. If you were not told that the cover is optional, then you should be able to claim. Or if you bought the cover online through a pre-tick option on a loan agreement, then you should have a case. If you were self-employed, out of work or retired then you wouldn't have been able to claim on the cover, in which case you have a stone cold case for getting your money back. The same may be true if you had a medical condition that meant you would have been unable to make a claim. You may also have a case if you were sold cover that ran out before the loan did, making it inappropriate for your credit deal. Many policies lasted just five years.



Q How can I claim?



A Contact the bank that sold you the cover. Most have set up special phone lines to deal with claims.



Q Should I go through a claims management company?



A No.



Q If I've already put a claim in, do I need to make another one?



A No. Lloyds says: "Customers who have already made a complaint to us do not need to do anything. We will be in touch with them as soon as we have processed their complaint." The other banks should do the same.



Q Will the bank contact me if I've been mis-sold the insurance?



A No. It will be up to you to tell your bank that you think you've been mis-sold.



Q If my claim is accepted, how much will I get?



A You should get back all the premiums you paid. There may be interest added and, in rare instances, there may also be distress or inconvenience payments.



Q What if the bank turns my claim down?



A If your claim is rejected, or nothing happens within eight weeks, you can complain to the Financial Ombudsman on 0300 123 9123.



Simon Read, Personal Finance Editor

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