UK banks lose Payment Protection Insurance challenge
UK banks have lost a judicial review that could have a major impact on whether more compensation has to be paid on mis-sold loan insurance.
Banks will now have to look back at past sales of Payment Protection Insurance (PPI), even if consumers have not complained.
Some estimates have said this could lead to a £4.5bn bill for the banks.
The British Bankers' Association (BBA), which said it was "disappointed" by the ruling, has 21 days to ask to appeal.
The BBA also said banks would continue to put some fresh cases on hold until it had decided whether to continue its challenge in the courts.
Thousands of people have already received compensation because they were mis-sold PPI policies, which are supposed to repay people's loans if their income drops because they fall ill or lose their jobs.
The banks challenged the Financial Services Authority (FSA) over guidelines it published last year which said banks should contact all past PPI customers and invite them to complain if they thought they had been mis-sold PPI.
But High Court judge Mr Justice Ouseley rejected the challenge in a judgement on Wednesday.
Natalie Ceeney, the chief financial ombudsman, said: "This judgment is very clear-cut - and it confirms that the ombudsman's approach to PPI complaints is right.
"People have been waiting a long time while the banks' legal action has been ongoing. I would now like to see financial businesses showing real commitment to sorting out their customers' complaints efficiently and promptly."
Some PPI sales proved appropriate but the banking industry has been accused of mis-selling them on a huge scale, generating many millions of pounds in profits by selling insurance that people were unaware they were paying for or did not need, or on which they could not claim.
Some of these people have been compensated, sometimes after their case was initially rejected by the banks.
During the judicial review hearings in January, the court was told that implementation of the new guidelines could cost the banks and credit card companies as much as £4.5bn, paid to millions of people.
Customers would have to be repaid their PPI premiums, plus interest, if the bank or other firm concluded that the customer would not have bought the policy in the first place if they had been fully aware of the policy's details.
A similar reimbursement could be due to those customers that paid for a policy in full up-front.
There have been more than 200,000 cases referred to the Financial Ombudsman Service about PPI in recent years, including 100,000 in the past financial year and now 5,000 each week. About three in four complaints have been upheld in the past.
The Financial Ombudsman Service said there should no longer be any stalling over fresh cases.
Complainants included people such as Gary Thomas, from London.
"I was sold a PPI policy - it amounts to 25% of the cost of the loan covering me for a five year period. In total it cost me £20,000 over a five-year period on a £60,000 loan," he said.
"I feel I was misled by this company and asked the ombudsman to look into it. It is nothing short of theft. They should be stopped from selling the insurance."
The UK's banks, represented by the BBA, challenged the FSA's new requirements.
They argued that the FSA was effectively applying new rules to previous sales - even when those sales were regulated by other FSA rules.
"It was due to the widespread concerns that the FSA and the Financial Ombudsman Service had not properly applied the law in this area - and only having exhausted all other avenues for resolving the underlying dispute that a judicial review was sought," the BBA said.
"We are disappointed with today's judgment and now need to consider the details of it very carefully as well as next steps, including whether it would be appropriate to apply for permission to appeal."
But the FSA, which said there had been 1.5 million complaints about PPI since 2005, said: "Our primary aim has always been to get proper redress, once and for all, for those with genuine complaints.
"We believe this decision signals the end of years of poor complaint handling and will trigger a dramatic improvement in the way customers are treated when complaining."
Ray Cox QC, a barrister who specialises in banking law, said the court ruling was a "massive endorsement" of the FSA's powers.
"The court has confirmed that the FSA has the power to require firms to pay compensation for breaches of its high-level principles, not just specific rules," he said.