The Financial Services Authority (FSA) is being challenged in the High Court over compensation for the mis-selling of payment protection insurance (PPI).

PPI Compensation Claims


The UK’s banks say new FSA rules are ‘wrong in law’ because they are retrospective.

They require firms to review past sales, which could lead to compensation worth £2.7bn being paid to 2.75 million people.

The judicial review starts in the High Court on Tuesday.

‘The FSA is trying to impose new standards on past sales,’ said a spokesman for the British Bankers’ Association (BBA).

This was rejected by the FSA, whose spokesman said: ‘These principles have been in place for a very long time and are nothing new.’

PPI polices are supposed to repay people’s loans if their income drops because they fall ill or lose their jobs.

The banking industry has been accused of mis-selling them on a huge scale, generating many millions of pounds in profits by selling insurance that people were unaware they were paying for, or on which they could not claim, or which they did not need.

New rules


In August 2010, the FSA laid down new rules for the banking industry, which came into force in December.

Part of their requirements meant banks would have to review past PPI sales, even where customers had so far not complained, potentially landing the banking industry with a huge bill.

Customers would have to be repaid their PPI premiums, plus interest, if the bank or other firm concluded that the customer would not have bought the policy in the first place.

And if the customer paid with a single payment up-front, but would have bought a regular premium policy instead had it been offered, the customer would have to be put back in the position they would have been in.



The UK’s banks, represented by the BBA, are challenging the FSA’s new requirements.

The BBA says the past sale of PPI polices will have to be judged by the new rules, based on the FSA’s general principles, rather than on the specific rules that applied at the time.

It argues that a breach of the FSA’s general principles does not in fact give customers any legal right to compensation with a specific complaint.

‘We believe the FSA is effectively creating a precedent which permits it to apply new rules to previous sales – even where those sales were regulated by other FSA rules,’ the BBA said.

‘Therefore, this ruling might not only affect customers who have bought PPI, but might also set a precedent that could affect all products regulated by the FSA.’

The BBA is also using identical arguments to challenge the way the Financial Ombudsman Service (FOS) deals with PPI complaints that come from disgruntled bank customers.



One side effect of this dispute is that thousands of fresh complaints have been put on hold since last October when the BBA first announced it would launch its legal action.

In December, the FOS, which is receiving about 2,500 fresh PPI complaints each week, revealed that it was struggling to deal with a growing backlog of complaints because some banks were simply refusing to engage with them.

This strategy has angered the FSA which, last Friday, issued a warning to the main banking industry trade associations, including the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA).

It told them their members had no excuse to avoid dealing with each complaint individually within the standard eight weeks.

‘We will take tough action against any firm which cannot demonstrate it is delivering fair outcomes for consumers, including because the firm is inappropriately relying on [part of the FSA’s complaints rules] to defer consideration of those PPI complaints that could and should be progressed during the judicial review,’ said Christina Sinclair of the FSA.

‘Such action may include referral for further investigation and enforcement action where appropriate,’ she warned.



PPI sales have become the main source of complaints that go to the FOS.

After numerous official enquiries and widespread complaints from consumer organisations, the financial authorities have concluded that several million bank customers were mis-sold PPI policies during the past decade.

The Competition Commission is in the process of stopping banks from selling PPI polices at the point where they agree to grant a loan or issue a credit card.

The High Court hearing is expected to last until Friday.

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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.