Debt Solicitors

By Kuljeet Mody

As the name suggests Payment Protection Insurance (PPI) is a mechanism used by the banking industry when issuing loans to their customers to cover the debt repayments. The PPI is designed to insure the consumer that in the event of loss of income through redundancy, illness etc their loan repayments are met and they are protected. PPI is generally sold as part of the initial deal when consumers take out a loan, mortgage or credit card. It is also possible to buy a “stand alone” PPI from an insurance company.

In theory this sounds ideal and a safe option to take particularly when taking out sizeable loans not normally covered by an overdraft facility. So, what is the problem?
In 2005 the Financial Services Authority (FSA) took over the regulation of general insurance and in November 2005 published a report criticising the legitimacy of the policies sold by the banks i.e. the policies were mis-sold and were not a viable product. In order to provide a scale of the issue when the report was published in 2005 the FSA received 833 complaints from consumers against their respective banks; in 2010 the number of complaints received was a staggering 49,196. This equates to a 5,806% increase in just 5 years.

The FSA’s / Financial Ombudsmen Service (FOS) action in 2005 commenced the long running dispute between them and the British Bankers Association (BBA) and is expected to conclude after six years in the coming weeks.

A decision was made in the Courts on 20th April 2011 in favour of the FSA/FOS and agreed that the PPI policies were indeed mis-sold and consumers were entitled to claim compensation against the respective banks. Leave was granted to Appeal which must be done by Wednesday 11 May 2011.

However, in an unexpected and dramatic turn last week Lloyds’ Banking Group Chief Executive, Antonio Horta-Osorio announced that they would not be challenging the decision and set aside £3.2 billion pounds as compensation for customers who were mis-sold. Readers should be aware that the government own a 41% stake in the bank and it raises the question on how much influence they had in making this decision. Do they expect the Courts to uphold the earlier decision? Following this decision there are rumours that Barclays will make an announcement before the 11th May which follows Lloyds. Barclay’s position is slightly different to Lloyds in that they did not take any government subsidy and also sold considerably less PPI’s than Lloyds. Therefore, do they anticipate that the Courts are going to uphold the decision too?

The British Bankers Association represents household names such as Lloyds Banking Group, Barclays, HSBC and Royal Bank of Scotland. With two out of the four major banks pulling out it places considerable pressure on HSBC and RBS to follow suit and if either one of them do what position does this put the BBA in?

As this long running dispute draws to a close it highlights to the general public how much control our regulatory bodies have and upholds the values they were set up to achieve. The banks have had too much power for far too long. We have seen the effects of indiscriminate lending and we have seen the profits made by selling unsuitable insurance policies to the unsuspecting hard working members of the public – their customers. The decision by the Courts is expected to be in favour of the FSA and hopefully will be a lesson to be learned by the banks and other industries.

(Note: At the time this Article was published BBA has decided that it would not appeal against High Court’s decision. In separate news announcement Barclays has also decided to set aside £1 billion towards PPI compensation claims).