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Banks expect to pay out more than £6bn in PPI claims

Activity surges due to involvement of claims management companies.

Britain's biggest consumer banks are having to increase the amount they have put aside to pay out as compensation for mis-sold payment protection insurance (PPI).

The banks, including Barclays, RBS and HSBC, were originally told by the Financial Services Authority to expect to have to pay out around £4bn in compensation for the mis-selling, they have already had to pay out £2.5bn, and the total liability is now thought to be in excess of £6bn.

The compensation is due because many banks were wrongly advising customers to take out the insurance, which covers minimum payments in the event that a debtor is incapacitated. The most egregious cases involved banks telling applicants that they had to take out the insurance in order to get a loan, or failing to mention that the insurance was a seperate product with its own premiums.

In April 2011, the High Court ruled that banks were required to pay compensation, and since then claims management companies have latched on to the issue, increasing the number of applications well beyond what banks expected. These companies are a mixed blessing for consumers: on the one hand, they have led to many more people receiving compensation which they are legally due than may have occurred in their absence (up to three-quarters of claims have been made through management companies, according to the Financial Services Compensation Scheme); on the other, they take fees of up to 25 per cent plus VAT for doing little more than sending a form letter to the claimant's bank.

Whether or not they are a benefit for consumers, they are definitely a pain for banks. Barclays is expected to increase the money it has reserved to pay claims by £300m to £1.3bn, and HSBC is taking its reserves from £270m to £400m. Lloyds and Santander both feel they have enough to cover the increased volume of claims, having put aside £3.2bn and £550m respectively. The final tally is still difficult to predict, but if the surge of claims is maintained, it could be as high as £8bn.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.