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Payment Protection Insurance bill could reach over £4 billion

Written by on 14 April, 2010

Over £4 billion in compensation could be paid to almost half a million people after they were mis-sold payment protection insurance, the Financial Services Authority have predicted in a revised report out last month.

The publication, titled ‘The assessment and redress of payment protection insurance complaints; feedback on CP 09/23 and further consultation’, was released in March. A revision of the original document which was published in September 2009, the FSA outlined its proposals for reforming the way in which complaints about this highly criticised insurance are dealt with by the insurers and banks providing it. The new draft was written in response to feedback from stakeholders and industry groups which was received after the publication of the original consultation paper last year.

The original estimate of the number of complaints likely to come in to the insurance providers was 158,000 – yet this figure has now been revised to be 450,000 complaints to deal with in the coming years.

The insurance is sold with credit agreements and covers payments in the case of illness or unemployment. The compensation payoffs may also be given to those who have not yet made formal complaints – and may not even be aware that they were sold an inappropriate policy.

The Financial Services Authority has predicted that the cost of settling any future mis-selling claims will go from £80 million to a possible £203 million annually for the next five years, now that the number of complaints has increased. Providers of payment protection insurance are also likely to have to pay between £900 million and £2.7 billion in order to compensate those customers who may not realise that they were ever mis-sold a policy.

Sold together with loans, finance agreements, mortgages and credit cards, payment protection insurance is there to cover repayments if people are out of work because of unemployment or illness. Many of the UK’s largest financial institutions have been the subject of complaints for their mis-selling of policies, and the insurance type is the most complained about financial product to the Financial Ombudsman Service.

The FSA has begun to take action against the companies by banning the sale of single-premium payment protection insurance with unsecured loans. The authority has also fined 23 firms over their sale of the insurance cover, charging them a total of almost £13 million.

The head of the FSA, Hector Sants has said that they plan to toughen up on protecting consumers from poor financial products to stop them being sold in the first place rather than waiting for the damage to be done and following with compensation.

The Financial Services Consumer Panel welcomed the more assertive approach from the FSA, claiming that the industry had pressured the regulator to republish the consultation with their detailed and somewhat critical feedback on September’s report. The need to revise the consultation further delayed consumers’ compensation and fair treatment, they argued.

Announcing a further six week consultation on its revised measures for payment protection insurance, the FSA proposed that the plans were designed in order to ensure customers are treated consistently and fairly, whether buying a new policy or complaining about an existing one.

Regulating the financial services industry, the FSA has four key objectives; maintaining market confidence, promoting public understanding of the financial system, securing the appropriate degree of protection for consumers, and fighting financial crime.

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