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U.K. Banks Fight $7.1 Billion Payment-Protection Rules

The British Bankers’ Association asked a court to prevent the U.K.’s finance regulator from imposing rules on how consumer complaints over payment-protection insurance should be treated.

Implementing the measures and handling complaints may cost the banking industry as much as 4.5 billion pounds ($7.1 billion), the BBA told Judge Duncan Ouseley at a court hearing in London today. It would also cause around 35 insurance intermediary firms to fail, said David Pannick, a lawyer for the association.

The BBA is seeking to prevent the Financial Services Authority from imposing the guidelines because they are “an unlawful means of requiring firms to implement a scheme under which they will be liable to make compensation payments,” the BBA said in court papers.

“The potential impact therefore of the FSA’s decision that we are challenging is very substantial indeed,” said Pannick. “Our concern is that we are now being held to different, more onerous standards.”

U.K. antitrust regulators also cracked down on the product, banning banks from selling most types of PPI at the same time they sell the loans it insures.

PPI is used to cover payments on credit cards and mortgages in case of illness or unemployment. Customers who bought PPI rarely compared prices and terms, switched providers, and usually weren’t aware they could have purchased insurance from other companies, the U.K.’s Competition Commission has said.

The FSA estimated that in 2006, 6.5 million PPI policies were sold each year, amounting to 5.4 billion pounds in premiums.

‘Sensible and Fair’

“We strongly believe that the package of new complaint-handling measures” is a “sensible and fair solution” for consumers and the industry, the FSA said in a statement. The agency is “vigorously contesting the BBA’s challenge.”

The FSA issued its new guidelines in August and clarified them in November after the BBA asked for a court review. Firms reject almost half the PPI complaints they received, and “some reject nearly all,” the FSA said in August.

Britain’s Financial Ombudsman “has identified tens of thousands of cases of mis-selling,” Adam Phillips, the chairman of the U.K.’s financial-services consumer panel, said in a statement today. “This litigation should not be an excuse for banks to apply a blanket ban on processing claims.”

The FSA will present arguments later at the hearing, which is scheduled to last four days.

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