Consumers who were duped into payment protection insurance (PPI) and costs they didn’t have to pay are being restored to their status quo and then some by over 215 million British pounds of monetary settlements.

PPI Compensation Claims

These settlements were distributed in the first half of 2011 from January to June. Per the Financial Services Authority, the huge legal payment is being managed and distributed by 16 major financial institutions who were the major players in the PPI scheme, representing over 90% of the cases of those allegedly harmed.

The PPI scandal involved numerous banks aggressively marketing and pushing PPI costs onto consumers borrowing from such institutions. The total exposure to the banks when the British courts finally ruled in the consumers favor total approximately £4.5 billion in expected payments due, covering multiple years of payments that such clients had made previously.

PPI requirements were not limited to large or specific loans either. The money-making requirement was added to loans big and small, including financing for cars, homes, credit cards, and consumer loans. Some of the earliest cases dated back to the previous two decades, with some consumer paying as far back as the 1990s. By the time the process had become institutionalized banks had figured out the charge was a windfall. Less than 20% of the funds collected were being paid back in actual payment protection claims. The PPI payments had in practice become a required payment to the banks with the institution having to provide nothing in return and still making interest charges on the affected loans.

Once complaints began to form, they fell into four major categories:

1. The PPI payments could add as much as 20% to 50% more cost to a loan financed through a bank pushing the requirement.

2. The terms for actually filing a PPI claim were so complicated, many claimants couldn’t get their claim through or were denied for not properly meeting all the claim requirements from the administering bank.

3. The PPI requirement was pushed onto customers that the bank personnel knew would never be eligible to make PPI claims due to their employment status being self-employed rather than working for an employer.

4. Many of the PPI claim processes in a majority of the banks were lengthy, slow, bureaucratic and complicated. The processes were so technical, many consumers were put off from filing any claims after becoming frustrated.

The first fine leveled by the FSA happened five years before in 2006. With an initial penalty of £56,000 against a smaller firm, the Regency Mortgage Corporation, the FSA made it clear compensation for consumers was going to be doggedly pursued. Three years later the FSA banned the practice of tacking on a PPI premium on home mortgages which was the major money-maker for home lenders and banks.

The FSA finally gained the banks’ ire when it imposed harsh restrictions on the selling of PPI in loans. These restrictions included a delay of seven days from a loan approval before PPI could be sold, a required customised quote for consumers being sold a PPI policy with complete cost detail, disclosure that the PPI charge is an extra on a loan and not a requirement, and disclosure of PPI claim success rates with the particular lender. The goal, in short, was to provide full informational education to the consumer before he accepted a PPI policy with a new loan.

The banks fought back against the regulatory hurdles with a lawsuit pursued by the British Banking Association. By hoping for a judicial case review, the Association hoped the power of the FSA could be diluted or cut off completely on the matter. Unfortunately, the PPI legal case was ultimately lost by the Association in the British high court. As a result, the FSA began to levy penalties and settlements for over 3 million consumers in 2011.

The initial pace of current year payments was slow at first compared to what began to move in later months. January through April averaged less than £30 million paid per month by the affected banks. However, by April the payment process began to pick up and by May and June £102 million was distributed.

Because the PPI scheme and issue so widespread, many of the significant bank players on High Street have had to establish reserves and temporary savings to meet payment requirements of the settlement process. Lloyds of London alone owes over £3.2 billion in compensation alone. Lloyd’s pot is the largest amount of any of the parties involved and likely a record-holder for settlements in general. However, the establishment is not only contender. RBS and Barclays have both had to reserve almost £1 billion each as well. Only HSBC was far lower, needing to set aside £269 million pounds.

However, despite the financial tidal wave movements of wealth redistribution described above, there are still thousands of cases pending disposition. The Financial Services Authority notes that almost 105,000 complaints came in during 2010, making the total caseload of decisions to process almost a quarter of a million.

Despite the numbers, the FSA has generally processed 75% of the claims in favor of the party filing the charge. Average settlements or payments have been in the range of £2,500 to £2,800.

There is no question the direction of the FSA on the PPI matter; the agency has committed to full restoration of financial status quo for every party caught up in the PPI scheme and inappropriate finance marketing. Additionally, the FSA has also proactively overseen and monitored the payment actions of firms who legally decided to settle to make sure their statements are followed up.

In the meantime the Banking Association is licking its legal wounds and debating whether to try and appeal the January decision or just bite the bullet and pay out. One the major players, Lloyds, threw in the towel already and has become a leader in processing settlement payments. This move as consequently taken further wind out of the Banking Association’s legal sails as a result.

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Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.