The British Banking Association's (BBA) decision to drop its legal battle over payment protection insurance (PPI) is a long overdue triumph for common sense - but what is PPI and what does it all mean for you?
PPI started being sold in the 1990s as an insurance policy on mortgages, loans and credit cards. It was meant to cover people's repayments if their income fell because they became ill or lost their jobs.
However, as the banks discovered how profitable PPI was in 2004 the Guardian revealed that many banks were returning just 15% of their PPI income to claimants they started to push PPI more and more. This cash cow for the banks was eventually spotted by the regulators who outlined four problems with it.
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Firstly, PPI was overly expensive premiums often added 20% to the cost of a loan, but in some cases it was over 50%.
Secondly, PPI was carefully structured to minimise the chances of anyone actually being able to make a claim.
Thirdly, that the product was being mis-sold either to customers who didn't realise they were getting it, or sold to people who would never be able to claim on it, such as the self-employed.
Finally, PPI was branded inefficient, as even the very few claimants who stood a chance of getting a payout faced a lengthy and complicated claims procedure.
As a result, thousands of people have been trying to win compensation from the banks after being sold PPI. But the banks have stalled and stalled on paying up. The Financial Services Authority (FSA) has now brought in strict rules about PPI, and has insisted that they be applied retrospectively meaning the banks should compensate anyone who has ever been affected.
The banks battled through the courts to avoid this, but now they've thrown in the towel, after both Lloyds and Barclays announced they were withdrawing from the court battle and preparing to pay victims compensation. It's just a shame it took them so long.
"PPI was mis-sold and complaints about it mishandled on an industrial scale for well over a decade. Now the industry must make amends by quickly reimbursing the millions of people it has ripped off," says Peter Vicary-Smith, the chief executive of Which? in the Daily Telegraph.
If you have or had a PPI policy, the first thing to check is whether it was mis-sold not all of them were. So check what your policy covered and whether it was appropriate for your circumstances when you were sold it. If you were mis-sold PPI then you don't actually need to do anything as providers are required to contact anyone they think may have been affected by mis-selling. But that could take a very long time, so you could try speeding up the process by contacting your PPI provider yourself.
Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance.
Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.
Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.
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