Exactly How Much Have Mis-sold Payment Protection Insurance (PPI) Compensation Payouts Cost The Banks?

Controversy was raised lately regarding the mis-selling of Payment Protection Insurance (PPI). These issues came about due to the failure of bank advisers to inform the customers that they are being issued the policy without informing them that it is non-compulsory as well as its other provisions.

The exposition of the said fiasco has angered most of the consumers and made them feel that their banks took advantage on them to gain more profits to finance their bankers' extravagant bonuses.

Eventually, the scandal brought the Financial Services Authority (FSA) to implement a ruling in January that will strip the affected banks a great amount that could go up to 4.5 million to pay back those who have been affected by the mis-sold.

As stated on the FSA guidelines, banks should communicate with their past PPI customers to inform them if they believe that they have been mis-sold so they can be liable for compensation. Apparently, the British Bankers Association (BBA) raised an appeal on the High Court to overturn the December ruling on PPI mis-selling.

During the hearing, BBA representative Lord Pannick QC informed the presiding judge, Mr Justice Ouseley, that the implementation will cost the banks an estimated amount of 3.2bn based on the 20% take up by those contacted who bought PPI policies since 2005. Meanwhile, FSA estimated that PPI providers will be spending to as much as 1.3bn to meet the new complaints during the coming five years.

The bank's challenge had been brought given the retrospective nature of the new rules, as they did not apply simply to complaints about new PPI policies taken out since December - something which Lord Pannick had described as "unlawful". Nonetheless, the BBA decided against an appeal after the rejection of their claim, with a series of banks subsequently setting aside money to pay out as PPI compensation.

Barclays, for example, announced in May after the April High Court decision that it would set aside 1bn to cover both customer redress and administration costs. The new chief executive at Lloyds, meanwhile, Antonio Horta-Osorio, confirmed that the bank would be ceasing its own battle with the FSA and increasing the amount that it put aside for PPI compensation to 3.2bn.

Another bank to confirm that it would not appeal the High Court verdict was Royal Bank of Scotland (RBS), which said in May that it would set aside some 850m to compensate customers that were mis-sold PPI. In doing so, the bank stated that it had an existing provision of 100m, and had already paid out around 100m in PPI compensation. The Co-op Bank, meanwhile, said that it had put aside 90 million for the purposes of PPI compensation.

According to some analyst PPI seems to be the biggest mis-selling scandal in the UK and will likely reach 8bn to more than 10bn against the original estimate of FSA's 4.2bn. This will clearly affect the bank industry tremendously.