Banks fight refunds in £3.2bn payment protection ruling

RETAIL banks were dealt a blow yesterday after the High Court rejected their judicial review, which protested the FSA’s implementation of what they say is “retrospective” justice.

The decision could cost the industry up to £3.2bn in compensation paid out to customers whom the FSA says could have been mis-sold Payment Protection Insurance (PPI), cover that can take over the payment of a loan for a period should the borrower lose their job.

In response to a high volume of complaints relating to PPI, the FSA issued new guidance on the product last year and told firms to enforce it in relation to all of the 1.5m complaints received since the FSA took over regulation of the product in 2005.

Banks say this is unfair. The British Bankers’ Association (BBA), which brought the case on behalf of the industry, said “The additional requirements in the policy statement effectively apply new standards to past sales.”

The BBA said it was “disappointed” and was considering whether to appeal against the ruling.

Lloyds Banking Group is believed to be particularly affected: it issued a statement to the market immediately saying that the ruling “could be material to the group’s financial position”, although it would not estimate the precise impact.

The FSA says that while the guidance issued last year is new, the principles that the guidance is meant to explain have been in place the whole time.

Ash Saluja, a partner at CMS Cameron McKenna, said there were serious concerns about the current system.

“The role of the Financial Ombudsman Service as a retrospective standard setter is not an appropriate basis for dealing with multi-billion pound compensation,” he said. “The banks are right to object; we should not have a rulebook to which back-dated rules can effectively be added in order to justify compensation.”