Over the last five years banks have already set aside more than 28 billion pounds to meet compensation claims from customers sold payment protection insurance (PPI) policies.

PPI policies were supposed to protect borrowers in the event of sickness or unemployment but were often sold to people who would have been ineligible to claim.

But the Financial Conduct Authority (FCA) said on Friday it planned to introduce a deadline for further PPI claims, as more than 20 billion pounds has already been paid out to over 10 million consumers.

"We take the view that a deadline ... would help bring finality and certainty in a way that advances the FCA's operational objectives of securing an appropriate degree of protection for consumers and protecting and enhancing the integrity of the UK financial system," the regulator said.

The British Bankers' Association, which has been lobbying for a deadline, had no immediate comment.

The watchdog said it aimed to issue a consultation by the end of the year, and set the deadline two years from the rules coming into force. The new rules would not come in before spring 2016, so consumers will have until at least spring 2018 to complain, it said.

Analysts at Citi bank said the deadline may trigger a front-loading of complaints but also greatly reduce uncertainty for banks. "We believe this is a positive outcome, with Lloyds set to benefit most," Citi analysts said in a note.

The share prices of UK banks Lloyds, Barclays, HSBC and Royal Bank of Scotland were all up by 2 percent or more by 1028 GMT, when the FTSE 100 was up 1.6 percent.

Consumer finance commentator and campaigner Martin Lewis said plans for a deadline were disappointing at a time when most claims are still being upheld.

ENDING INERTIA

Normally a deadline of three years is placed on complaints about financial products but none was set with PPI as many customers were unaware they had bought the product.

The watchdog said that it was an appropriate time to set a deadline as rules on PPI claims have been in place since 2010 and surveys showed most people were aware of possible compensation.

A deadline could help end some of the "inertia" being seen as some consumers are not bothering to make a claim, the FCA said. It could give no figures on potential remaining claims.

A high and growing proportion of PPI claims now go back a decade or more, with the evidence to back them becoming increasingly "stale" or patchy, the FCA said.

The FCA said that sales of loan insurance fell dramatically after early 2009 and the current rules and guidance about making a complaint have been in place since December 2010.

PLEVIN JUDGEMENT

The regulator also said the time limit would also apply to complaints being contemplated following a landmark ruling last year by the Supreme Court which suggested there might be an additional cause for complaint over PPI sales concerning the level of commissions paid on the sale.

The court found that Paragon Personal Finance breached the Consumer Credit Act by failing to tell a borrower, Mrs Susan Plevin, that the charge of 5,780 pounds for her PPI policy, which was added to the loan of 34,000 pounds, included a commission paid to Paragon and a credit broker amounting to 71.8 percent of the total PPI premium.

If the ruling was found applicable to other PPI sales, banks may have to pay out billions of pounds more in compensation.

The FCA said it will now consult on rules and guidance about how firms should handle PPI complaints in the light of the Plevin judgement.

However it is suggesting that a commission of 50 percent or more on a PPI sale should be deemed "unfair", with the customer potentially eligible for compensation, but only if they have not yet successfully claimed for PPI mis-selling.

The average commission was about 67 percent, and redress would cover the difference between the 50 percent "unfair" threshold and the commission actually paid, the FCA said.

Analysts at Citi said that the proposals to impose the same deadline on claims related to the Plevin case should also mitigate the impact of the ruling on the lenders.

"With the onus seemingly placed on the consumer to complain, within a fixed deadline, this should greatly reduce the redress risk associated with Plevin, in our view," the analysts said.

(Editing by Greg Mahlich)

By Steve Slater and Huw Jones