* Daniels says about half of PPI complaints are false
* Daniels says most customers buying PPI got good value
* Ombudsman data shows Lloyds loses 98 pct of cases
* Lloyds has set aside 5.3 bln stg for compensation
By Matt Scuffham
LONDON, Feb 14 (Reuters) - The former head of Britain's biggest retail bank said the majority of insurance policies taken out on loans and mortgages were not mis-sold, blaming false claims for the rising bill for banks paying compensation.
Eric Daniels, chief executive of Lloyds between 2003 and 2011, said banks had paid out on some claims from customers who did not even have payment protection insurance (PPI) because they could not cope with the number of complaints.
"A fair number of bogus claims were paid out because the number of claims were so overwhelming that banks could not analyse whether or not they were genuine or not," he told a panel of lawmakers on Thursday.
Banks are facing a bill of over 12 billion pounds ($18.7 billion) to compensate customers wrongly sold policies meant to protect borrowers who lost jobs or became ill, and industry sources have told Reuters they expect the number to double.
Daniels said he believed around half of PPI claims were "completely illegitimate".
Commission Member Andrew Turnbull, a former head of Britain's Civil Service, had countered that fraudulent claims were "irrelevant" in the context of the wider mis-selling.
PPI is the most complained-about financial product ever in Britain, with the financial ombudsman service having received more than half a million cases.
However, Daniels told the Parliamentary Commission on Banking Standards that the product solved a "fundamental customer need" and that PPI was a "very competitive product."
"I believe that customers did know what they were buying. They got good value. In those cases where they were mis-sold products, that clearly is wrong, but that's not the majority in my view," he said.
Lloyds, which has 6,000 staff dealing with claims, said in November that it had set aside another 1 billion pounds to compensate customers mis-sold PPI, taking its total provision to 5.3 billion pounds, by far the highest in the industry.
Yet Daniels defended Lloyds' past sales practices.
"I believe Lloyds always tried to impose the highest standards and embraced the principle of trying to treat the customer fairly. We took extraordinary steps to ensure we trained our people well," he told the commission.
Banks have blamed claims management firms, which take a chunk of their clients' compensation in return for handling the paperwork, for peddling false claims, although data from the ombudsman does not back that up.
The ombudsman said that, of the 158,000 complaints it received in its last financial year, less than 6,000 were erroneous. It also said 98 percent of complaints against Lloyds were upheld in favour of the customer, the highest of any bank.
Lloyds opened the floodgates to a wave of claims when it set aside 3.2 billion pounds for PPI compensation payouts in May 2011, after Britain's banks had lost a landmark court case.
Daniels was criticised by Lloyds' shareholders for leading the bank into a takeover of ailing rival HBOS at the height of the financial crisis.
The ill-fated deal saddled conservatively run Lloyds with huge losses on commercial and retail loans and led to a 20 billion pound state bailout which led to taxpayers taking a 40 percent stake in the bank.