The financial watchdog has been forced to delay its crackdown on controversial payment protection insurance (PPI) amid fears from banks that redress to customers could hit £4 billion.
The Financial Services Authority (FSA) has extended its consultation into PPI by six weeks amid criticism from banks and other financial providers.
Last year, the FSA banned the sale of single premium PPI policies - where the premium is rolled into the loan and attracts interest - alongside personal loans and proposed an outright ban to stop banks from selling PPI at the time credit is taken out.
However, Barclays launched a legal challenge against the point of sale ban and, back in October, the Competition Appeal Tribunal upheld its appeal – effectively putting the ban on hold.
Following further consultation, the FSA now admits the financial industry is “highly critical” of its plans to reform the PPI market.
Dan Waters, director of conduct risk at the FSA, says: “We’re disappointed that the industry has responded so critically to our proposals but we remain 100% committed to bringing about genuine, lasting change in the PPI market.”
Concerns from the industry resolve around the cost of refunding customers who have been mis-sold PPI.
The FSA’s consulation document reveals banks and insurance brokers fear they will face a compensation bill of between £700 million and £1.2 billion over the next five years.
These figures are based on the number of people who have already complained about PPI – if firms were forced to investigate whether other customers had been mis-sold PPI the total redress bill could hit £4 billion.
The delay to the crackdown on PPI has outraged consumer groups.
Adam Phillips, chairman of the Financial Services Consumer Panel, says: “It seems that too many firms have regarded PPI as an easy product to sell and make money, without considering whether it really is right for the customer.
"Now the industry seems determined to fight against the FSA introducing new rules and guidance, which would ensure consumers receive a fairer outcome if they make a complaint.”
He adds: “We are also concerned that this consultation reveals yet another delay in getting fair treatment for PPI consumers.”