Millions in line for compensation as banks abandon fight over ‘protection’ insurance

The move is expected to cost firms between £7 billion and £9 billion, making the controversial product the biggest ever mis-selling scandal in the UK.

But consumers are likely to have to wait some time before they receive their money, due to the massive volume of complaints that banks and other groups which sold the cover must handle.

Martin Lewis, creator of website MoneySavingExpert.com, which has long campaigned on the issue, said: “This is a wonderful day for consumers. For once the banks have done the right thing and backed down.

“As much as £9 billion that was wrongly taken could now be paid back.”

The level of their exposure became clearer this morning, after the British Bankers’ Association announced it would not be appealing against a High Court challenge it lost over new Financial Services Authority rules on PPI mis-selling being applied retrospectively.

Lloyds Banking Group said last week that it was pulling out of any further legal action and setting aside £3.2 billion to compensate customers.

It was joined today by Barclays, which expects claims to cost £1 billion, while HSBC, which stopped selling the policies in 2007, has made a provision of 440 million US dollars (£269 million).

Taxpayer-backed Royal Bank of Scotland also confirmed that it would not be pursuing further legal action, although it has yet to put a figure on how much compensation it is likely to have to pay out. Unofficial estimates based on the group’s market share put the figure at around £1 billion.

A number of other banks are also likely to face significant bills, as will stand-alone credit card and loan providers and some insurers.

It is currently unclear exactly how many consumers will be affected, with the FSA previously estimating that around three million people were mis-sold the policies, with compensation likely to total £4.5 billion.

But the regulator’s redress figure now looks far too conservative, suggesting the number of people affected may also be considerably higher.

What does look certain is that PPI is set to become the biggest mis-selling scandal the UK has ever seen, with final payouts likely to dwarf the £4.5 billion paid out to people who were wrongly sold personal pensions and the £2.7 billion paid out to victims of endowment mis-selling.

Today’s move means firms must now start processing claims for people who think they were mis-sold PPI, which had been put on hold while the legal action was ongoing.

Groups must also pro-actively contact customers and alert them to the fact that they may be entitled to compensation if they identify a pattern of mis-selling.

The news was welcomed by consumer groups, which have called for consumers to be compensated since it first became clear that the policies were being mis-sold to many people who would never be able to claim on them.

Peter Vicary-Smith, chief executive of Which?, said: “We’re delighted that the BBA has at last seen sense. Hopefully this will be a watershed moment in how banks treat their customers.

“It was a colossal error of judgment by the BBA to have brought this case in the first place, which has even further diminished the banking industry’s reputation in the eyes of consumers.

“PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade. Now the industry must make amends by quickly reimbursing the millions of people it has ripped off.”

Adam Scorer, head of external affairs at Consumer Focus, added: “Refunding billions of pounds to millions of people will be a mammoth undertaking and to get it wrong would add insult to injury.

“We are calling on the banks to put aside the resources that are going to be needed to ensure people get their money back quickly and efficiently.”

PPI, which covers debt repayments if the holder is unable to work due to an accident or illness or if they lose their job, is the single most complained about product to the Financial Ombudsman Service, which receives around 5,000 new disputes on the issue each week.

It is currently upholding around three quarters of cases, paying out compensation of £2,750 on average.