(c) Sky News 2011, 16:49, Wednesday 20 April 2011
The British Bankers' Association (BBA) has lost a High Court challenge brought over new regulations to control the selling of payment protection insurance (PPI) to borrowers.
The judgement means consumers who took out PPI will have to be contacted by providers over the mis-selling scandal, to agree potential settlements.
Mr Justice Ouseley, sitting in London, was told the new regulations could cost the industry up to £4.5bn in compensation payments.
The Financial Services Authority (FSA) estimates PPI providers will have to pay out up to £1.3bn for new complaints received over the next five years.
Banks (Euronext: SBK.NX - news) face additional bills of up to £3.2bn following reviews of previous PPI sales and pro-actively contracting customers to offer them redress.
They have been accused of generating millions of pounds in profit by mis-selling PPI.
The banks, represented by the BBA, challenged the FSA and the Financial Ombudsman Service over how the new rules on PPI came into force in December.
The banks had asked the court to quash the regulations because they will not only apply to new policies sold after the beginning of December, but also to complaints relating to cover sold before the new regime was brought in.
Lord Pannick QC, for the BBA, said the changes could lead to 35 insurance companies failing, with the resulting refunds to borrowers falling on the Financial Services Compensation Scheme.
He told the court: "If that assumption is an underestimate of the response rate, the costs are going to substantially increase," he said.
The new regulations set by the FSA aim to ensure consumers are treated fairly, both when they buy PPI and when they complain about being mis-sold the cover.
PPI policies are meant to repay people's loans if their income dries up because they fall ill or lose their jobs.
People who may be eligible for compensation claim they were unaware they were paying for PPI, or did not need the insurance. Others claim they felt pressured into taking it out, alongside a loan or credit card.
Today's ruling backs the new regulations which state that PPI providers will now be required to talk potential customers through the key feature of a policy and make it clear to the customer that the cover is optional.
Lord Pannick said the banks recognised when a PPI sale was conducted outside rules which applied at the time it was "right and proper" that compensation should be paid. But he argued the banks are now being held to "more onerous standards".
Martin Lewis from Moneysavingexpert.com told Sky News: "Consumers have won. It's a fantastic result.
"Banks have to go out and knock on their customers' doors and say 'we mis-sold you PPI'.
"If you have a PPI policy you could be entitled to thousands of pounds back. This is a devastating result for the banks."