Banks will try to block moves by the regulator to ensure fair payouts for victims of debt insurance mis-selling.
The British Bankers' Association, the banks' trade body, is seeking a High Court judicial review to stop the Financial Services Authority (FSA) forcing lenders to review millions of payment protection insurance (PPI) sales.
The FSA crack down, due to start in December, could lead to hundreds of millions of pounds in compensation (see the PPI Reclaiming guide).
The FSA, which will vigorously fight the moves by the BBA, stresses firms must implement the tough changes until the legal process is complete (see the FSA's PPI crack down MSE News story).
The independent Financial Ombudsman Service has also confirmed it will continue to handle complaints as normal in the interim.
Banks and other lenders have been mis-selling PPI, designed to cover loan and credit card payments if you cannot work, on a massive scale for years.
An unrepentant BBA says in a statement: "We regret that today we have filed papers with the High Court asking for some decisions made by the FSA and the Ombudsman to be judicially reviewed.
"This relates to the proposed new rules on handling payment protection insurance complaints.
"It has unfortunately been necessary to do this because there is insufficient legal clarity about what the FSA and FOS is proposing in this area.
"Everyone's actions must be assessed on the basis of a proper understanding of the relevant law and regulation and this procedure will bring this about.
"We will continue to explore all opportunities for dialogue with the FSA to resolve the industry's concerns. No one wants to go to court but the law needs to be clear. We hope to get this resolved as quickly as possible."
Mis-selling for years
In the last five years there have been more than a million complaints made to firms about PPI. Some 80% of the 1,500 consumers a week who complain about mis-selling to the Ombudsman win compensation.
The sector once generated an estimated £1.5 billion a year but is slowly dying as numerous banking giants have stopped selling the controversial product (see the Lloyds ends PPI sales MSE News story).
Consumers have been urged to claim now in case the banks win.
Wendy Alcock, MoneySavingExpert.com money analyst, says: "The good news about this challenge is that the FSA has decided to allow consumers to continue complaining, rather than enforcing a hold as was the case with bank charges.
"Consumers must take this chance to complain now while they still have the chance. If the banks were to unjustly win this review, the chances of getting compensation will be limited."
FSA crack down
The regulator's moves, announced in August, compel lenders, where they have compensated large numbers of mis-selling victims, to contact other borrowers flogged PPI in a similar manner. Some may not even realise they have been mis-sold.
It's thought almost three million people could be entitled to compensation under this ruling.
The FSA, responding to the BBA move, says in a counter statement: "The FSA will contest the BBA judicial review.
"In the interests of consumers, firms will be expected to continue handling complaints while this process is ongoing. If consumers are unhappy with how their complaint has been handled they may refer it to the Ombudsman.
"Since the FSA took on regulation of PPI in 2005 it has taken enforcement action against 24 firms for sales failings.
"The FSA has carried out three thematic reviews, issued warnings, halted the selling of single premium PPI with unsecured personal loans and visited over 200 firms in order to improve the market.
"The FSA strongly believes the package of new complaint handling measures is a sensible and fair solution for consumers and the industry alike. And that is why the FSA will vigorously contest the BBA's judicial review of the new complaint handling procedures for the PPI market."
Further reading/Key links
Ombudsman guide: Financial Fight Back
Reclaim mis-sold debt insurance: PPI Reclaiming
Other issue-specific reclaim guides: Bank Charges, Credit Card Charges, Direct Debits, Setting Off, Mortgage Arrears, Endowment Mis-selling