Payment protection insurance is expected to become the most complained-about financial product ever sold after a High Court ruling that lenders must reopen mis-selling claims.

More than 1.5m customers have already requested compensation from their loan provider for cover sold to them to protect repayments and analysts say millions more are likely to have a case.

Most claims submitted were rejected by the banks, but those which subsequently reached the Financial Ombudsman Service have been found overwhelmingly in favour of the customer.

The ombudsman is currently receiving 5,000 fresh claims for PPI mis-selling each week.

More than 16m PPI policies have been sold to consumers alongside debt products including mortgages, credit cards and unsecured loans. The policies repay loans if a borrower’s income drops because of unemployment or illness.

But many consumers were unknowingly sold the insurance, which was added to the total loan amount. Others, including students or self-employed workers, signed up to policies that they were ineligible to claim.

From December 2010 the Financial Services Authority brought in new rules which required insurers to review past sales of PPI, even where customers had not yet made a complaint.

But banks, represented by the British Bankers Association, challenged the reform, saying the FSA was unfairly applying new rules to old cases.

Wednesday’s High Court decision in favour of the FSA could cost banks more than £4.5bn in compensation pay-outs. Average compensation paid out so far to consumers who were mis-sold PPI is £2,750, but one customer was awarded £44,000.

The City watchdog estimates that up to £1.3bn will be paid out on new complaints over the next five years, and £3.2bn paid as a result of reviewing previous PPI sales and proactively contacting customers to offer redress.

Analysts’ estimates for the final bill range from about £3bn to about £8bn. The difficulties in quantifying the amount of claims they could receive mean banks have not yet made any provisions for losses.

The FSA’s probe into PPI comes amid a broader crackdown by the regulator on the way consumer products are sold in the aftermath of the financial crisis. A series of mis-selling scandals have prompted the regulator to abandon its “light touch” attitude to supervision in favour of a more intrusive approach, which could include outright product bans and caps on fees.

Honouring the PPI claims would increase the pressure on banks just as profits are already under strain from tighter margins and costly recommendations from the Independent Commission on Banking.

For Lloyds, the bill would follow a string of other writedowns, including a £500m refund to mortgage customers announced earlier this year and higher than expected impairments at its Irish division. The bank was also the hardest hit by the Vickers report last week, which said the bank should sell a bigger slice of its business than the 600 branches ordered by European authorities.

“For Lloyds, the Vickers report was worse than expected – and this is also worse than expected. It’s certainly unhelpful, particularly as consensus profit forecasts have already been cut by about 20 per cent for this year as the bank dampened expectations,” said one banking analyst.

Big banks gave little guidance on how the ruling would affect customers at this stage, saying they would wait to hear whether the BBA would launch a final appeal. Behind the scenes some appeared to have little hope the decision would now be overturned.

“It looks fairly black and white,” said someone at one of the top banks.

PPI complaints

However, other industry insiders drew some comfort from the banks’ surprise victory over the fairness of overdraft charges after the case was taken to the Supreme Court in 2009.

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