FSA report reveals proposed cut on reclaim interest rate
by Luke Whitmore, 18th May 2011
Banks embroiled in the PPI mis-selling scandal attempted to have
the interest rate owed on compensation claims reduced last year, it
has been reported.
A consultation paper released by the Financial Services
Authority establishes that when the new regulations were proposed
in March 2010, many lenders were registered as objecting to the
interest rate of 8% that was to be applied to mis-sold Payment
Protection Insurance reclaims.
The interest added to PPI refunds was intended to reimburse
consumers for the inconvenience of being sold an inappropriate
policy, as well as the profit they could have made for their money
had they invested it instead.
On the basis of the latter, some banks suggested that the
interest rate on PPI claims should fall to as little as 1.5%, this
being a more probably rate of return had the borrowers invested
their money elsewhere.
But advisors for the FSA pointed out that many people who had
been mis-sold PPI had been paying higher interest rates than 8% on
their loan.
The pressure to reduce the interest on PPI compensation came
before the court case last year which saw an ultimately
unsuccessful attempt by the banks to contest the FSA's new rules
for refunds, making it clear that this was an attempt by financial
institutions to reduce the liability they have ended up exposed to.
With the banks obliged to refund customers who were mis-sold PPI,
some experts have predicted that the financial sector could end up
paying out up to £10 billion in compensation.
In the report, the FSA stated "Some industry responses objected
that the rate of 8 per cent simple interest that the proposed
guidance applies to redress payable by firms to complainants is too
high and should be reduced, being more than an investor could have
obtained".
It was not clear which banks raised objections to the rate.
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