The FCA has asked firms to review 2.5 million payment protection insurance complaints which may have been rejected unfairly or have paid out too little to consumers in redress.
About 13 million PPI complaints have been brought since 2007. Firms are now having to write to a further five million customers who are at “high risk” of having been missold PPI but have not yet complained.
Since the regulator started tracking payments in January 2011, a total £16bn has been paid out in compensation. According to Which?, Royal Bank of Scotland, Barclays, Lloyds Banking Group, Santander and HSBC have set aside a total £21.4bn to fund payouts.
FCA chief executive Martin Wheatley says: “Making sure anybody previously missold PPI is treated fairly now and paid redress where it is due is an important step in rebuilding trust in financial institutions. In around 2.5 million complaints this was not necessarily the case, so at our request firms will be looking at these complaints again.”
Independent regulatory consultant Richard Hobbs says: “The regulator might divide opinion but it does have quite robust economic criteria for this sort of thing and it would not put the banks through another round of reviewing unless it thought the amount of money possibly owing to customers is fairly significant, and significantly greater than the cost of administering the review.”
The FCA says between 50 per cent and 85 per cent of PPI policies were missold, depending on the type of policy (see table).
The Financial Ombudsman Service has received more than one million complaints, about a quarter of the total, from people unhappy with their provider’s response on their PPI complaint.
The regulator says firms are improving how they deal with complaints and the number of decisions overturned by the FOS has dropped from 88 per cent in 2011 to 56 per cent last year.
But it adds some large firms have failed to assure the regulator “of the overall fairness and consistency” of their complaints-handling.
A British Bankers’ Association spokeswoman says: “The banks are committed to ensuring that where customers were missold PPI they receive the full compensation they are entitled to. We are pleased the regulator believes the redress process is working well.”
But Which? executive director Richard Lloyd says the fact that since 2011 an average of one in seven PPI complaints to the FOS have been upheld is evidence banks have not been paying compensation where it is due.
He says: “High uphold rates for PPI claims going to the ombudsman were always a sign the banks were not treating customers fairly.”
In March, a BBC Radio 4 documentary revealed Lloyds had been using a regulatory provision called “alternative redress” to reduce its PPI compensation bill, though the bank said it was “in line with regulatory guidance”.
Alternative redress works on the assumption that customers who were missold single premium PPI would have bought a cheaper regular premium policy instead of nothing at all. In these cases, the bank can deduct the cost of the regular premium policy from the full compensation payment.
Penguin Wealth managing partner Craig Palfrey says the regulator is right to ask banks to reopen the 2.5 million complaints because the scandal is damaging the industry.
He says: “I would imagine banks are thinking: ‘Let’s reject a claim or give a lower payment the first time and see what happens’. The scale of this is scary and it continues to put a dampener on our industry. When it comes to selling critical illness cover or income protection this stuff does not help.”