£9bn of PPI compensation up for grabs!

Having abandoned their legal fight against rip-off insurance, banks must pay out billions.

After more than a decade of dishonesty and deception, British banks have finally admitted defeat in the war against rip-off payment protection insurance (PPI).

Banks back down

On 20 April, the British Bankers’ Association (BBA) lost its High Court judicial review covering PPI complaints and compensation. Immediately, the banks' trade body announced that it would appeal this decision by 10 May, thus keeping thousands of PPI complaints on hold indefinitely.

However, the BBA has backed down and today announced that it and the banks have decided that they do not intend to appeal against the verdict in favour of the Financial Services Authority (FSA) and Financial Ombudsman Service (FOS).

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Hilariously, the BBA's announcement was one of the shortest, grumpiest press releases I've seen in my 24 years in financial services (here it is in full). Since this announcement, some BBA members have called for the body's chief executive, Dame Angela Knight, to resign over her part in this fiasco.

A protection racket

In theory, PPI covers your monthly repayments on a mortgage, loan, credit card or other finance agreement if you cannot work due to an accident, sickness or unemployment. In practice, this insurance is hugely overpriced, greatly mis-sold and extremely difficult to claim against.

Hence, I'm delighted with this outcome, as countless PPI mis-selling claims will now be released from legal limbo, opening the floodgates to billions of pounds in compensation payments.

Big bills for banks

Since losing in court on 20 April, some of the UK's biggest banks have set aside vast sums to meet their PPI liabilities. Here's the latest list of bank provisions against PPI:

* Reported as $440 million.

As you can see, Britain's four biggest banks have already put aside more than £5 billion to meet a future wave of PPI compensation claims.

However, having worked in the industry myself, I suspect that the banks could face between four million and five million PPI mis-selling claims. Thus, I reckon that the final bill for PPI mis-selling will be between £8 billion and £10 billion (let's call it £9 billion for cash).

How to win back thousands

Towards the end of 2010, the FSA introduced new rules governing how PPI is sold. Somewhat unusually, the FSA decided to make these rules apply all the way back to 2005, thus making old PPI policies subject to its new regulations.

In addition, the burden is on banks to pro-actively contact PPI policyholders whom they suspect have been mis-sold this cover. Therefore, in theory, you don't need to contact your bank, building society or other lender, as it should come to you. Also, if you've had a previous PPI complaint rejected since 2005, then your lender should re-open your case.

Then again, I suspect that the average PPI mis-selling claim could be as much as £2,000 a time (plus interest), so it's well worth pursuing a claim if you feel you were duped into buying this insurance. Instead of waiting, contact your bank -- using its usual complaints process -- as soon as possible.

Thus, if you feel that you were sold PPI under false pretences (some borrowers still don't realise they have it) in the past six years (since 2005), then don't delay -- claim today!

This applies to all PPI policies, including those sold alongside:

• mortgages;
• second mortgages or secured loans;
• personal loans or car loans;
• credit cards or store cards;
• retail credit agreements (shop-bought finance)
• dealership finance (hire-purchase agreements and other forms of motor finance); and
• similar credit/finance agreements.

If your PPI provider doesn't play ball, or hasn't given you a decision within eight weeks, then demand a 'deadlock letter' with which you can take your case to the free Financial Ombudsman Service.

Alas, with 5,000 PPI complaints arriving at the FOS every week, it could take a long time before the Ombudsman reviews your complaint. Nevertheless, the FSA estimates that around four in five PPI complaints go in favour of consumers, with the average payout being £2,750.

Most importantly, never use a claims-management company to chase your compensation, as these firms usually pocket between 25% and 40% of your payout. Instead, read the FOS guide to PPI for consumers and follow this official advice on getting justice.

Now for the bad news

Of course, when banks lose billions in this way, they simply look for ways to make this money back from customers. Therefore, I expect banks to hit back by charging higher interest rates and steeper fees to new and existing borrowers. This ruling could even mean the end of free banking as we know it.

What's more, we as taxpayers own 84% of RBS and 43% of Lloyds, so we'll have to foot most of the £4 billion bill for PPI payouts from these part-nationalised banks. Grrrr!

In summary, yet again, it's heads banks win, tails we lose. The best we can hope for is that the financial watchdogs don't take 10-15 years to stamp out the next big financial scandal!

More: Find cracking credit cards | More power to your credit card | Don't get ripped off ever again