Millions of customers who were mis-sold PPI (payment protection insurance) by their lenders will now be able to claim compensation after the banks dropped their legal challenge against the FSA's new rules on selling the insurance.
PPI is a special type of insurance that protects the policy holder if they are unable to make loan or credit card repayments due to redundancy, illness or an accident.
However, banks and other lenders mis-sold PPI policies on a mass scale to borrowers from the late 1990's onwards. Customers were sold unsuitable policies that would never pay out or they were charged for policies they did not know had been taken out on their behalf.
The scandal is going to cost the banking industry an estimated £9bn and has been called one of the greatest mis-selling scandals in UK financial history.
Since 1995, 16.1 million PPI policies have been sold. 1.5 million customers have complained and those who have been successful have received an average of £2,750 in compensation.
However, financial experts are estimating that an 'enormous' number of customers are as of yet unaware that they have been mis-sold a PPI policy. They estimate that 5 million people could still be eligible for compensation.
The banks initially tried to stop the wave of claims that were bound to appear after the FSA passed new rules on the sale of PPI. The rules also required lenders to retrospectively assess the sale of PPI to previous customers. The BBA (British Banking Association) finally dropped the legal action after the High Court dismissed their case.
Lloyds was the first bank to withdraw from the legal action, followed closely by Barclays. Now RBS and HSBC have also announced they have set aside vast sums of money in order to compensate their customers.
Consumers who think they may have a claim are advised to get out their copy of any loan or credit card agreement and see if they are paying for PPI. They should then contact the lender directly. Further complaints can be made to the Financial Ombudsman Service.
James Daley, editor of Which? Money, said: "The announcement is an enormous victory for consumers."
Read more on the story (the Independent)
Read the background to the story (Contact Law)
Find local solicitors who can assist with PPI claims throughout the UK (FindLaw)