Banks fight refunds in £4.5bn insurance scandal

Banks yesterday blocked calls to refund hundreds of thousands of customers who bought payment protection insurance (PPI), despite losing a landmark legal challenge against a crackdown on the discredited products.

In the latest twist in the long-running PPI scandal, a High Court judge threw out a judicial review by the British Bankers' Association (BBA) against moves to force its members to contact customers if there was a good chance they had been mis-sold policies.

Campaigners estimated that the ruling could lead to three million customers receiving £4.5bn in refunds, consisting of premiums and interest. However, banks said they would continue to put claims on hold until they have decided whether to appeal against the decision, despite a call from the City regulator, the Financial Services Authority (FSA), to start reconsidering complaints immediately.

PPI covers payments for loans and credit cards if the policyholder falls ill or loses their job, but the policies are riddled with loopholes, such as exempting claims from the self-employed or those with back injuries, the major cause of workplace illness in the UK.

In the latest attempt at a clean-up of the £5bn-a-year PPI industry – revealed by The Independent three years ago – the FSA announced that banks would have to review past sales of PPI and take action to ensure that previous customers had not been ripped off.

In November, the BBA announced a judicial review of the plan, freezing consideration of PPI complaints until the conclusion of the case. Hours after Mr Justice Ouseley rejected the challenge yesterday, the BBA refused to start reconsidering the cases, saying it would consider appealing in the next 21 days.

A spokesman said: "We are disappointed with the judgment and now need to consider the details of it very carefully as well as next steps, including whether it would be appropriate to apply for permission to appeal. Any complaints that are directly affected by the judicial review and therefore cannot be decided will continue to be placed on hold until the next steps have been decided."

The decision outraged consumer groups, who have been warning of PPI mis-selling for years. PPI is lucrative for financial providers: whereas insurers pay out claims in all but 22 per cent of motor insurance premiums, they keep 86 per cent of PPI premiums.

Peter Vicary-Smith, chief executive of the consumer group Which?, said: "Instead of dealing with mis-selling, the banks are trying to wriggle out of paying up using the courts."

Martin Lewis, creator of Moneysavingexpert.com, urged the FSA to threaten to remove the banks' licence to sell insurance unless they backed down and removed the waiver. Accusing the banks of behaving "abominably", he said: "If they can't play the game they shouldn't play at all."

The Citizens Advice Bureau first raised the alarm about PPI in September 2005, when it made a super-complaint to the Office of Fair Trading (OFT), warning that banks were pricing the policies "outrageously", selling them inappropriately and mis-handling complaints.

The OFT, then the Competition Commission, took a further three and a half years to bring forward proposals for tackling the mess, including a ban on single-premium PPI – where a lump sum was added to the loan – and a seven-day waiting period before providers can approach loan customers with a policy, which will come into force in October.

Around 200,000 customers have complained to the free Financial Ombudsman Service about PPI. More than 80 per cent of its decisions go in favour of customers and against the banks.

Adam Phillips, of the FSA's consumer panel, said: "It is shameful that some in the banking industry are still refusing to admit to the scale of PPI mis-selling and compensate consumers. It would be very disappointing indeed if today's litigation marked the beginning of a long drawn out legal dispute. It is time for the banks to stop hidingbehind expensive lawyers and to finally give consumers the redress theydeserve."

The customer: 'I was excluded from claiming but I wasn't told'

"The judgment is great news for people like me who have a PPI claim on hold," says Siobhan Parker, 34, of London. "However, judging from the number of hoops the bank has made me jump through so far, I bet they'll appeal the case to make us wait even longer for our money."

Siobhan paid out for a useless PPI for six years before she found out that she was excluded from claiming on it. "It started when I took out a credit card in January 2004. I was offered the option of insurance, but was self-employed at the time which meant I was excluded from claiming. But they didn't tell me that."

Only by reading an article about the subject did the marketing executive realise she'd been wasting money for years and had a clear case that she'd been mis-sold the useless cover. "With help from Which? I put in a claim to my bank last June. I reckon I'm owed more than £500 but my bank refuses to tell me how much and has put my case on hold since January. It still looks like it will be some time before I get my money back."

The slow march to justice

September 2005 Citizens Advice complains about PPI, warning of high prices, limited cover and poor claims handling.

February 2007 The OFT refers Citizens Advice's complaint to the Competition Commission for investigation.

November 2008 CC proposes banning single-premium policies and sales of policies within 14 days of a new loan.

January 2009 In its final report, CC dilutes point of sale ban to seven days.

August 2010 Financial Services Authority brings in new rules on complaints and forces review of old cases.

October 2010 British Bankers' Association launches judicial review of FSA crackdown. Banks put mis-selling claims on hold pending its outcome.

April 2011 High Court judge backs FSA. BBA says banks still won't pay out because it is considering an appeal.