BANKS could face £3bn in further costs from mis-selling payment protection insurance (PPI) after the FSA hit them with new guidelines saying they must write to every customer who could potentially be affected.
That means lenders will now have to go back through over 16m policies worth £17bn sold over the last seven years and write to every consumer who could have been mis-sold the insurance. They might also have to include those sold before 2005, which were worth another £17bn.
The new guidelines means that PPI will now switch from being a “one-off” hit to banks’ 2011 profits into an ongoing and costly headache.
So far, lenders have paid out just £1.9bn in compensation, a quarter of the total cost of the scandal, which was a key factor in the FSA’s decision.
The guidelines also aim to cut claims management companies out of the equation – firms that try to convince customers that their services are required to claim compensation and who then bag a large chunk of the pay-out.
FSA managing director Martin Wheatley said: “We think that the redress due from this process may well exceed what has been paid so far, and that is why we are acting now to clarify our expectations.” The FSA has warned firms to ensure the letters are “free from financial jargon or marketing material”.
PPI is insurance to cover loan repayments for a certain period if a borrower loses her job, but it was quietly bundled into many products sold to customers who did not want or need it, increasing the cost of their loans.