Millions of customer who took out payment protection insurance (PPI) who have not yet claimed for compensation are to be contacted with details of how to do so.
Since a High Court judgement in April 2011, banks have been busy paying back customers who were mis-sold the insurance, but it is thought there are millions more people who do not realise they could be in line for compensation.
The Financial Services Authority has told banks that it must write to these customers to explain how they may have been mis-sold PPI, why they could be entitled to some money back, what the customer should do to respond to the firm, the time limits involved and the need to act promptly.
Any correspondence must be free from 'financial jargon' and marketing material.
It is estimated that the number of PPI policies sold since 2005 amounts to 16.1 million, worth an estimated £17 billion.
The amount paid in redress last year was £1.9 billion, meaning banks face paying back billions more in compensation.
The regulator is urging people who receive the letters to respond, as it says that response rates for such types of letters have historically been low – sometimes as low as one in ten.
"This is important guidance and marks a key moment in the story of PPI," said Martin Wheatly, managing director of the FSA.
"So far the majority of payouts have been for complaints received before, or put on hold during, the judicial review However, we are now beginning to see firms considering how to treat customers who were mis-sold but have not complained.
"We think that the redress due from this process may well exceed what has been paid so far, and that is why we are acting now to clarify our expectations.
"By ensuring that firms are clear about the problems they have identified and the potential redress due, we are aiming to prevent people running out of time if they choose to complain."
Consumer group Which? has welcomed the move, saying there is 'no excuse' for banks making the PPI mess even worse' through unclear and confusing contact with customers entitled to compensation.
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