UK banks years away from end to mis-selling scandal - ombudsman

LONDON (Reuters) - Britain's banks will be paying out compensation to customers mis-sold loan insurance for years to come, having already set aside 24 billion pounds to deal with the issue, the chief financial ombudsman said.

The Financial Ombudsman Service, which steps in when banks and their customers can't reach an agreement, said it expected to settle 250,000 disputes about the mis-selling of payment protection insurance (PPI) in the next financial year.

PPI policies were meant to protect borrowers in the event of sickness or unemployment but were often sold to those who would have been ineligible to claim and the resulting compensation bill has made it Britain's costliest ever consumer scandal.

The ombudsman said it was continuing to receive around 4,000 complaints about PPI each week, although that is down from a peak of 12,000 cases a week in late 2012.

"Complaints about PPI are still the main driver of financial disputes. And although numbers are slowly declining, it will be years before we can truly say this mis-selling scandal is over," Chief Ombudsman Caroline Wayman said on Tuesday.

Lloyds Banking Group has set aside 11.3 billion pounds for compensation, more than any other bank. Barclays, Royal Bank of Scotland and HSBC have also set aside billions of pounds.

In its proposed plan and budget for the 2015/16 financial year, the ombudsman said it would take on 200 new staff to deal with new complaints relating to PPI and other matters.

The ombudsman, which is funded by the financial services industry, said it planned to freeze case fees paid by businesses and reduce its cost to the industry by 13 percent.

(Reporting by Matt Scuffham; Editing by Mark Potter)