Lloyds Banking Group has begun a mass mailshot of 231,000 letters offering possible refunds to Halifax customers who may have been mis-sold payment protection insurance on their credit cards, under a costly and large-scale outreach programme codenamed Project Kestrel.
Internal documents obtained by the Observer reveal that 8,300 letters went out last Monday. Almost a quarter of a million will be dispatched by mid-February, asking credit card customers to contact a special call centre operated by outsourcing firm Capita.
The exercise by Lloyds, which is 41% owned by the government and is the parent of Halifax, Bank of Scotland and Lloyds TSB, comes amid an ongoing furore over the mis-marketing of so-called PPI policies which protect cardholders against debts if they lose their jobs, fall ill or have accidents. Analysts believe Lloyds could face a bill of more than £1bn for compensation if it were found to have mis-sold PPI.
Anger over the policies has been rumbling for years, with banks accused of routinely adding PPI to the accounts of unwitting customers who have no eligibility or need for cover. Some were self-employed, making them unsuitable for cover against job loss, or had life insurance policies that made it unnecessary to buy protection for their dependants against repayments in the event of loss of life.
The controversy will reach the high court this week, as the British Bankers' Association seeks a judicial review of guidance from the Financial Services Authority on compensation. Banks complain that the FSA has retrospectively changed the rules on how policies should have been sold.
"It's as if you have a speed limit of 30mph, then reduce it to 20mph, and give out tickets retrospectively," said Eric Leenders, executive director for retail banking at the BBA. The dispute includes an argument over whether certain oral disclosures ought to have been given to customers who bought policies in the past.
Lawyers say that as many as 20 million PPI policies have been sold by banks, and the Competition Commission ruled last year that PPI sales at the point of issue of credit cards and loans would be banned.
A Lloyds spokeswoman said the Project Kestrel mailshot was "a normal business review that all organisations do on different products" to check that proper procedures had been followed: "It's a proactive move by the bank just to ensure customers got the right products for their needs."
The letters will go out to customers sold policies in 2008 and 2009. Cardholders who respond to letters will be quizzed by call centre staff about their employment status and life insurance cover at the time they bought policies. If they are found to have been unsuitable, they will be offered money back.
Consumer advocates have argued for much more wide-ranging refunds. Dominic Lindley, policy adviser at the consumers' organisation Which?, said customers as far back as 2005 could be entitled to a refund: "It's good that they are contacting customers, but it should have been made clear to people that these policies were optional."
The Financial Ombudsman Service, which arbitrates on customers' disputes with banks, has dealt with 161,205 PPI complaints and has upheld 89% of grievances. Scores of "no win, no fee" lawyers are advertising for PPI customers, promising to win them compensation.