Banks lose PPI case

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"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," the FSA said in a statement.

The British Banking Association (BBA) has said it will appeal the ruling.

However, pending that appeal, the court decision should mean that banks will have to contact consumers directly for redress when they're aware that their policy was mis-sold.

It should also mean banks relinquishing their stranglehold on PPI complaints that have already been made.

PPI thaw

Currently, only Santander are continuing to process PPI mis-selling complaints.

BBA members, a list which includes all of the UK's High Street banks, and Nationwide building society put a freeze on complaints when the judicial review was announced in October.

Millions of people are awaiting decisions on PPI policies, which are meant to protect consumers when they are unable to make repayments on borrowing as a result of extraordinary circumstances such as suddenly becoming unemployed.

Many were sold a policy that never would have paid out.

In other cases, consumers didn't realise that they had a choice about taking the policy at all.

In response to a long campaign against the insurance by consumer bodies and foot dragging by the banks the Financial Services Authority (FSA) released a new set of guidelines on dealing with PPI complaints.

It's those guidelines - which it's estimated could see £2.7bn paid out to 2.75 million consumers - that the banks took to judicial review.

The guidelines stated that once poor mis-selling handling was uncovered in a sales team the banks would have to compensate all consumers sold PPI by that, tainted, means.

Not only does that rule significantly and directly drive up the amount of compensation that banks will have to pay out it means that they will have to go to consumers rather than waiting for them to complain about mis-selling, a process, which, itself, will cost millions of pounds to set up.

Good day for the FOS

The decision will also be a relief for the Financial Ombudsman Service (FOS) which is charged with resolving disputes between banks and consumers.

The whole infrastructure of the FOS has been buckling under the weight of PPI complaints: it's starting the year with a budget deficit of £8 million after being forced to take on more staff to deal with the increased caseload.

Over 50% of the 97,237 new complaints referred to the FOS in the final half of 2010 related to PPI.

Over 75% of cases are resolved in favour of the consumer.

The weight that has been placed on the FOS over the affair further underlines how inadequate financial providers have been throughout the resolution process.

Complaints are only bought to the FOS if the consumer has been unable to resolve the matter with the bank for eight weeks. And in January, for example, RBS and Natwest were fined £2.8 million by the Financial Services Authority (FSA) for persistently failing to deal adequately with customers' complaints.