Lloyds Banking Group is to reopen customer compensation claims for missold payment protection insurance (PPI).

Thousands of existing cases will be processed, and customers who suspect they were missold a policy have been invited to contact the bank.

Consumer groups said this week they hoped that other banks would also forgo legal action and repay consumers who were wrongly sold policies.

However, Royal Bank of Scotland, which is 83 per cent owned by taxpayers, indicated on Friday that it was not yet ready to end the legal appeal.

Lloyds, which is responsible for around one-third of all PPI policies sold, shocked the market this week when it announced that it had set aside £3.2bn to compensate customers who took out loan insurance cover. The bank was expected to face a bill of £1.5bn.

Analysts are now wondering whether the Financial Services Authority (FSA) forecast of a total bill for the banking industry of £4.5bn for PPI was a huge under-estimation. Some believe the banking industry could now face payouts of £9bn.

More than 16m PPI policies have been sold in the UK to customers taking out a personal loan. They were designed to cover repayments if a customer was unable to work as a result of redundancy or illness. But although the cover is not compulsory, consumer group Which? discovered that most providers were automatically including PPI when selling personal loans. Some were also sold to customers who could not claim, such as those with a pre-existing medical condition.

The charge usually took the form of a one-off premium added to the total cost of the loan.

Banks have rejected most claims from consumers who said they were mis-sold the insurance, but the ombudsman has upheld the majority of cases passed on. The FSA wants the banks to proactively contact customers they suspect were mis-sold PPI, but providers argued that they are being subjected to new rules for old sales unfairly and appealed against the regulatory changes.

In April the High Court found in favour of the FSA, raising consumer hopes that they would receive compensation. No bank except Lloyds has so far said whether it will look into claims.

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