Banks could end up paying an extra £6.4billion in controversial payment protection insurance payouts to millions of ‘forgotten victims’. The Financial Services Authority, is ordering banks, insurers and brokers to write to 12million PPI customers who have yet to claim, telling them they may be due a payout.
Insider industry calculations which show that, if just six in every ten people respond to the mailshot and are successful, it will take the expected total PPI compensation bill to £14billion. This would blow a huge hole in the banks’ own provisions for the mis-selling scandal, currently £7.6billion including administration costs, and force a major rethink on how they plan to compensate customers.
The FSA strongly suspects a total 10.8million people — or 90?per cent of the 12million people the banks write to — could be eligible for a payout. The watchdog is forcing banks to spell out more clearly to customers what they are entitled to.
The FSA worries the number of people who respond to the banks’ letters will be much lower than this — around 20?per cent. This would keep the compensation paid to these forgotten victims within the £8.6billion estimate banks and insurers are expecting to pay out in PPI claims. This figure includes £7.6billion set aside on the balance sheets of the big five High Street banks, plus an extra £1billion from smaller brokers and insurers.
Confusion over PPI
Some of the high-street banks have already written to some of their customers. But there are concerns in some cases that these letters have left customers baffled. People have found the letters confusing on a number of different levels. Some banks haven’t been clear about what customers are entitled to, and the process for how they should lodge their claim has been confusing in some cases. People have also found the language in the letter confusing.
Some customers were told that their bank had already calculated the figure of PPI redress for them but there was no reference to how much this was or how the figure had been arrived at.
Banks and insurers have been slammed for dragging their feet on payment protection insurance compensation as a financial watchdog warned that a record number of mis-selling cases are still waiting to be resolved.
Increase in Claims
The Financial Ombudsman Service said it has 130,000 cases on its books in the financial year 2012/13 – up from 109,500 this financial year and more than double the 60,000 PPI cases resolved in 2010/11.
The high number of complaints is likely to make up the half of its workload, the FOS is consulting on plans on how to cope, including proposing businesses pay an additional fee of £350 for PPI cases on top of the £500 standard case fee.
PPI was sold to consumers on the basis that it would cover repayments of loans or card debt in the event of sickness or unemployment, but a widespread scandal emerged. Huge numbers of policyholders found that the insurance was useless because they would be unable to claim, for example if they were self-employed or retired.
The Financial Services Authority recently said that more than £1billion was paid out in the first 10 months of 2011 to customers complaining about PPI. The FOS expects to take on 285,000 new cases in the next financial year overall, compared with 259,000 this year.