Britain's banks have failed in their bid to have new rules on the selling of payment protection insurance (PPI) oveturned. This brings the banks nearer to being forced to compensate millions of customers over mis-sold PPI.

There are estimates that the amount needed to cover such compensation payments could be near the £3 billion mark. This is because the rules would be applied restrospectively and the banks would have to re-open old failed claims and apply the new rules.

The banking experts have come back with the argument that any losses that the banks suffer would just be passed on to their customers.

PPI was offered as a means for the client to continue repaying their loan should they suffer from such mishaps as an accident, sickness or unemployment (known as ASU within the industry).

There are several issues with PPI.

This type of cover would only be able to be used to pay off the loan, not for paying off higher priority debts like council tax arrears. So it is not as flexible (or as cheap) as proper income protection available from an IFA.

Many policies were sold to those that did not need it (servicemen, civil servants and pensioners for example) as they either had guaranteed incomes or redundancy clauses or both. So they would never have qualified for a payout under the schemes making an expensive policy worthless.

There were also few or no checks to prevent people with pre-existing conditions from taking a policy out as the policy would be worthless in these circumstances as well.

These policies were generally sold as a lump sum up front cost. Now, when you consider that many of these policies could cost around 20% of the amount advanced (so a £10,000 loan would need a PPI cover of £2,000) and people borrowing money don't generally have wads of cash lying about, then this was added to the loan and interest paid on the whole amount.

It turns out that complaints to banks over PPI mis-selling are rising and the FSA upholds a staggering three out of four of them.

The banks, through the British Bankers' Association (BBA), have 21 days to appeal this decision.

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