Effects Of Mis-sold Payment Protection Insurance (PPI) On Banks And How Much It Cost Them In Compensation

Controversy was raised lately regarding the mis-selling of Payment Protection Insurance (PPI). These issues came about due to the failure of bank advisers to inform the customers that they are being issued the policy without informing them that it is non-compulsory as well as its other provisions.

The recent expos has earned public disenchantment as they have been tricked of their money. Obviously, it was a clear profiteering racket of banks which in turn provided their staff high commissions and bonuses at the expense of their clients. Nonetheless, when the Financial Services Authority (FSA) took over the task of regulating the insurance industry, it demanded all banks who have issued PPI to amend the mis-selling. On a hearing in January it was revealed that banks will be stripped (or out of pocket for) of 4.5 million to redress the issue.

As stated on the FSA guidelines, banks should communicate with their past PPI customers to inform them if they believe that they have been mis-sold so they can be liable for compensation. Apparently, the British Bankers Association (BBA) raised an appeal on the High Court to overturn the December ruling on PPI mis-selling.

During the hearing, BBA representative Lord Pannick QC informed the presiding judge, Mr Justice Ouseley, that the implementation will cost the banks an estimated amount of 3.2bn based on the 20% take up by those contacted who bought PPI policies since 2005. Meanwhile, FSA estimated that PPI providers will be spending to as much as 1.3bn to meet the new complaints during the coming five years.

The bank’s challenge had been brought given the retrospective nature of the new rules, as they did not apply simply to complaints about new PPI policies taken out since December – something which Lord Pannick had described as “unlawful”. Nonetheless, the BBA decided against an appeal after the rejection of their claim, with a series of banks subsequently setting aside money to pay out as PPI compensation.

Barclays, for example, announced in May after the April High Court decision that it would set aside 1bn to cover both customer redress and administration costs. The new chief executive at Lloyds, meanwhile, Antonio Horta-Osorio, confirmed that the bank would be ceasing its own battle with the FSA and increasing the amount that it put aside for PPI compensation to 3.2bn.

Additionally, Royal Bank of Scotland (RBS) confirmed that it will no longer file an appeal with the High Court and set aside 850m to cover the cost to recompense the PPI claimants. Accordingly, RBS has already released 100m to customers and has an additional existing provision of 100m for the purpose of PPI compensation. Meanwhile, the Co-op Bank also apportioned 90 million to redress the affected customers.

Some analysts have predicted, however, that the PPI scandal could cost the industry rather more than the FSA’s initial estimate of 4.2bn, with 8bn or even in excess of 10bn being feared by some banking insiders.

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