Loan insurance tops UK complaints table

LONDON (Reuters) - Payment protection insurance (PPI) was Britain's most complained-about financial product last year, accounting for nearly two thirds of consumer disputes mediated by the Financial Ombudsman Service.

PPI, which allows borrowers to keep up loan repayments if they lose their income, prompted a total of 157,716 disputes during 2011, the most ever generated by a single product, the Ombudsman said on Tuesday.

The insurance, often bundled with a loan or credit card, was widely sold to consumers who were not aware they were buying it or who were ineligible to claim, triggering one of the biggest mis-selling scandals ever suffered by Britain's banking industry.

Britain's top retail lenders Lloyds Banking Group, Barclays and Royal Bank of Scotland last year set aside over 4 billion pounds ($6.3 billion) between them to cover compensation to PPI customers.

The move came after the banking industry lost a legal challenge against tighter rules governing the sale of PPI imposed after investigations by the Financial Services Authority and the Competition Commission.

The ombudsman said it mediated a total of 264,375 disputes between consumers and financial services companies in 2011, a 26 percent increase compared with the previous year.

"This year's been a struggle for many consumers, who've found themselves burdened by debt, besieged by claims companies and bewildered by the complexity of financial services," chief ombudsman Natalie Ceeney said.

About one in five of the 1.2 million initial enquiries and complaints the ombudsman received went on to become formal disputes. ($1 = 0.6328 pound)

(Reporting by Myles Neligan)