Banks could be forced to pay back billions of pounds in compensation to customers who were mis-sold Payment Protection Insurance (PPI).
The Financial Services Authority (FSA) has been investigating the PPI industry for five years, and says in that time it has found "wide and deep evidence of weaknesses in PPI sales".
Following its investigation, the FSA has published a policy statement confirming a package of measures to protect consumers in the PPI market and has given lenders until December 1 to comply.
The FSA estimates that the measures, which include rules forcing lenders to ensure that complaints are handled properly and redressed fairly, will force the financial services industry to deal with about 550,000 complaints a year for the next five years.
Average compensation will vary from £900 for those who were mis-sold about regular-premium PPI policies to £1,800 for those mis-sold single-premium policies – which could see the banks pay up to £3billion in compensation.
Dan Waters, the FSA’s director of conduct risk says the FSA now looks forward to consumers being treated fairly whether they are buying or complaining about PPI. "With this package of measures we’re confident we can mend a market that has been broken for too long," he said.
"This remedy is fair to consumers and the industry alike. The onus is now on the industry to ensure it treats all customers fairly. We will be monitoring the implementation of our guidance closely to ensure real change is delivered."
The Citizens Advice Bureau, who launched a super complaint in September 2005 calling for an Office of Fair Trading investigation into the PPI business, says it welcomes the fact that the FSA is taking firm and appropriate action to "get to grips with the harm done to consumers by widespread mis-selling of payment protection insurance (PPI) over many years."
Spokesman Peter Tutton said: "We agree with the FSA that the PPI market has been broken for too long and needs fixing. A huge step to restoring consumer confidence is ensuring that people who complain get a fair hearing and proper redress.
"Up until now, firms have too often handled complaints very badly, so FSA action to spell out to firms what is expected of them was absolutely necessary.
However, the FSA has not been able to force backs to re-examine cases they have previously dismissed as it does not have the legal power – consumers in this situation will have to take their case up with the Financial Ombudsman. The Ombudsman has already dealt with more than 100,000 PPI cases and so far has found in favour of the consumer in four out of five cases, awarding compensation of £1,500 on average.
Consumer groups argue that if in the majority of cases the Ombudsman is finding for the consumer, the banks should be forced to look at these cases again - Which? argues that the FSA should be granted more power to ensure this happens.
"We want the Government to act swiftly and activate the FSA's power to force lenders to review rejected PPI cases so consumers whose complaints were wrongly dismissed can get the redress they are due" said Which? chief executive, Peter Vicary-Smith.
Mr Vicary-Smith continued, "If you feel you've been mis-sold PPI, you should always put in a complaint. If your bank rejects it then go to the Financial Ombudsman."
©Fair Investment Company Ltd