News and Press
Compliance in the wake of the PPI ruling - what's next for banks?

Payment Protection Insurance (PPI) has been on the FSA's radar for a number of years. Its supervisory focus in this area recently came to a head when the British Bankers Association (BBA) brought a High Court challenge to the legal validity of its policy statement, PS10/12, which it dealt with the assessment and redress of PPI complaints. When judgment was handed down in April of this year in favour of the FSA, the BBA and banks announced that they did not intend to appeal. In the aftermath of this decision, banks are now faced with the question of 'now what'?

Now what?

The FSA originally estimated that the industry could face £4.2 billion in claims relating to mis-sold PPI. This sum seems almost naïve and certainly grossly underestimated when compared to the £10 billion now estimated by some City analysis.

Banks are well aware that the court ruling in favour of the FSA will have costly implications, and have set aside vast sums to deal with the floods of complaints that are expected over the coming months. Banks will also have to deal with the numerous complaints that were put on hold until the ruling came through, and so they now have a significant backlog of complaints to return their attentions to. Many banks are expecting material losses to result from this.

The pressure to deal with existing complaints that have been placed on the back burner and the new complaints sure to follow from the court's decision is exacerbated by the media attention that has followed PPI. This is not helped by 'No Win No Fee' firms that have all been jumping on the bandwagon of the FSA's judicial success. As a result, customers are given unrealistic expectations to anticipate a large payout.
Whilst banks have agreed to comply with the FSA's PPI complaints handling requirements, they do not intend to reconsider complaints that they had already rejected. In 2010, the FSA was forced to publish a second PPI consultation paper, after its original proposal to compel firms to reconsider rejected complaints was heavily criticised. The final policy statement was subsequently published without this rule, and so firms will not need to revisit any complaints that they had previously dismissed when complying with the FSA's PPI complaints requirements.

The Future of PPI

As a consequence of past mis-selling, there is a significant risk that PPI will now been branded as a bad product. In a bid to circumvent the damaged reputation of the PPI industry and the reluctance of customers to purchase this product in the future, we expect to see an emergence of a range of PPI alternatives over the coming years.

What this means for regulation

It is no secret that the FSA has radically changed the style in which it regulates firms. Historically, the FSA’s approach was regarded as ‘light-touch’, or ‘principles-based’. There has however been a notable and seismic shift towards ‘outcomes-based’ regulation delivered through intensive supervision and heightened intervention. This is evident in the way that the FSA has dealt with PPI complaints.

In following this proactive trend, it has been argued by some that the FSA has gone too far on a number of occasions. Whilst the Court may not have agreed in relation to PPI, the challenge brought by the BBA that the FSA unlawfully applied retrospective regulation on PPI complaints handling, certainly stems from this argument. The BBA has however said that they "continue to believe that there are matters of important principle which we will be taking forward in other ways".
 

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