Britain"s banks are being warned they may have to pay out as much as £5bn in compensation to customers who have been mis-sold insurance policies.<\/h2>
There are suggestions customers may have been overcharged by more than £1bn
The policies are known as payment protection insurance (PPI) which is supposed to come into operation if the person who is buying a product is unable to pay for it because, for instance, they lose their job or become ill.
However, the Competition Commission has been looking into PPI sales for some years, suggesting customers have been overcharged by more than £1.4bn a year.
Revenues from the sales have since plunged.
The current warning comes from US financial services group Morgan Stanley after Bank of America last week put aside £375m in case of future claims.
But, Morgan Stanley warns, British banks could take a far heavier hit with the "big five" having to pay out the billions to compensate customers under a worst case scenario.
The Financial Services Authority - the City watchdog - in August introduced proposals for banks to handle PPI complaints and redress customers fairly where appropriate.
The British Bankers" Association is seeking a judicial review of whether the FSA can apply new standards to old sales.
At present, there are 12m outstanding PPI policies, with Morgan Stanley"s figures based on 20% of those making a claim and almost half of those claims being upheld.
Banks could pay an average of £2,000 for each of those 1.1 million claims, and incur £400m in administration costs and fines, it estimated.
