LONDON – British regulators said on Friday that they had begun a review of the efforts that banks have taken to compensate consumers who were improperly sold a contentious insurance product costing the industry billions of dollars in claims.
The Financial Conduct Authority’s review of the loan insurance comes as a persistent wave of claims over nearly four years have cost British banks about $26 billion.
The regulator said its review would assess whether those efforts were meeting the objectives of protecting the public and enhancing the integrity of the country’s financial system.
The regulator will also consider whether further intervention is appropriate, such as additional communication efforts to consumers or a possible timeline on complaints. The findings are expected to be released in the summer.
Through the end of December, British banks had paid out 17.3 billion pounds, or about $26 billion, in compensation on about 14 million claims related to the loan insurance, according to the Financial Conduct Authority.
The so-called payment protection insurance was sold broadly by banks in Britain to consumers taking out mortgages, applying for credit cards and seeking other loans.
More than 45 million policies were sold from 1990 to 2010, netting banks about £44 billion in premiums. But the complex pricing and the terms of the policies made it inappropriate for many consumers, according to the authority.
Regulators took the industry to court in 2011, with the first lender agreeing to settle claims in April of that year. But the costs associated with settling the issue have far outweighed the industry’s initial estimates as claims have continued to roll in.
Claims peaked in 2012, but the pace of new ones being filed has not slowed as quickly as the industry had expected.
Management companies have appeared in Britain in recent years to handle the flood of consumer complaints, with many advertising on daytime television in Britain. Banks have complained to regulators that they are being forced to deal with invalid claims by these companies.
In a report last August, the regulator said that about 70 percent of all claims filed have been upheld.
But the continued pace of new claims has forced the country’s biggest banks, including the Royal Bank of Scotland, Barclays, HSBC and the Lloyds Banking Group, to set aside additional reserves and routinely discuss the pace of claims on their earnings calls.