The Financial Ombudsman Service says compensation payouts for payment protection insurance are “nowhere near” the profits banks made from the product.
Speaking to the Parliamentary Commission on Banking Standards today, FOS chief executive Natalie Ceeney said banks made far more money from the products than they are paying back in redress.
The current total amount set aside by banks stands at around £12bn but some have predicted it could hit £25bn.
Last month, the FSA said it was in talks with the British Bankers’ Association about imposing an April 2014 deadline on PPI claims.
Ceeney said: “Even the redress that has been repaid so far doesn’t come anywhere near the profits made over PPI.
“It is certainly true that if they tackled this earlier the bill would be far lower, without doubt. One of the disappointing factors for us is that this has been a long period of prevarication where they thought that if they could kick it into the long grass it would go away. Unfortunately there is now a big bill that needs to be repaid.”
Lord Andrew Turnbull said banks’ own ”idiocy” stopped earlier payouts, while Labour MP Pat McFadden slammed the “ludicrous” timescale for PPI compensation.
In response to PPI misseling, Ceeney said the Financial Conduct Authority needs to be more proactive and focus on different forms of redress other than fines.
She said: “We can’t simply wait until people complain, they will often complain many years after the event. Some indications from the FCA about how will it operate by looking at business models, incentive schemes, and penetration rates seem to be absolutely right. It’s the right direction of travel.
“One of the problems of the past has been to respond to a failing with a fine for a company. For many it is simply a small cost of doing business and the profits from continuing can be far in excess of the fine.
“We have been public about using enforcement action to put things right by enforcing proactive compensation or forcing firms to write to customers for proactive redress rather than waiting for individuals to complain. There is increasing use of it by the FSA and fines are not the only answer.”