Santander UK, the UK's third largest bank, has lost £651m after mis-selling PPI (payment protection insurance) policies to customers - a figure that represents a 50 per cent decrease in half-year profits.

The bank has had to earmark £731m for compensation payments - more than HSBC but less than Lloyd's, Barclays and RBS, which have allocated £3.2bn, £1bn and £850m respectively for payouts to misled customers.

Santander UK, which was formed by a merger of Abbey National and Alliance & Leicester, is a subsidiary of the Santander Group - the largest bank in the Eurozone and one of the largest banks in the world. Last year it took £1.2bn in half-year profits, compared to £549m this year, the BBC reports.

Wikipedia notes that, of the 20 million PPI policies in the UK, 95 per cent were mis-sold, with many people unaware they even have a PPI policy. So far 2 million people have successfully claimed compensation, with the average repayment (including compensation for interest) of £2,500.

PPI policies are designed to help people repay loans in the event of illness or job loss. However, many people were unaware they were paying for the coverage, did not need it, or were not adequately covered. This was because many of the PPIs were sold in conjunction with credit cards or mortgages, and were only explained in the small print.

The Financial Services Authority (FSA) has fined many banks for mis-selling PPI policies after the financial sector lost a high court challenge earlier this year. Steps have been taken to insure similar scams do not occur in the future, and a television advertising campaign has been launched to alert people that they may have been mis-sold PPI policies.