British banks could be forced to pay customers billions of pounds (dollars) in compensation after losing a legal challenge on Wednesday over the mis-selling of loan insurance.
London's High Court rejected a claim from the banking industry that new rules imposed by the Financial Services Authority on the sale of so-called payment protection insurance, or PPI, policies should not be applied retrospectively.
That means that banks will have to write to all past customers and invite them to complain if they believe they were mis-sold PPI policies.
The insurance is supposed to cover the repayment of people's loans if they experience a fall in income because of illness or job loss.
The industry has been accused of mis-selling the policies on a wide scale, raking in profits as many customers were unaware they were even paying for them _ or could never have claimed on the policies.
The FSA estimates that compensation claims could run to a total of 4.5 billion pounds ($7.4 billion).
"This is a huge win for the millions of people mis-sold PPI," said Oliver Morgans, financial services expert at Consumer Focus. "It has taken years of the banks being dragged kicking and screaming, but they are finally being forced to do the right thing by their customers."
But there was also anger from consumer groups as the British Bankers' Association, which represented banks in the legal challenge, said it would not act further until it decided whether or not to appeal the High Court's ruling.
"We are disappointed with today's judgment and now need to consider the details of it very carefully as well as next steps, including whether it would be appropriate to apply for permission to appeal," the BBA said in a statement.
"Any complaints that are directly affected by the judicial review and therefore cannot be decided will continue to be placed on hold until the next steps have been decided."
Natalie Ceeney, chief ombudsman at the Financial Ombudsman Service, said the judgment was clear-cut and should be acted on immediately.
"People have been waiting a long time while the banks' legal action has been ongoing," said Ceeney. "I would now like to see financial businesses showing real commitment to sorting out their customers' complaints efficiently and promptly."
The FSA brought in new rules in December, requiring banks to talk potential customers through the key features of a policy, rather than just providing them with a document giving the information. They also have to prove that they made clear to the customer that the cover is optional.
The banks had asked the High Court to quash the retrospective element of the regulations.