Update, 13 October, 12pm. Other banks (except Santander) are also freezing complaints. See the Banks join Lloyds on PPI MSE News story.

Government-backed Lloyds Banking Group is defying regulatory guidelines by putting all payment protection insurance (PPI) complaints on hold, MoneySavingExpert.com can reveal.

The UK's largest bank, which includes Lloyds TSB, Bank of Scotland and Halifax, now faces a backlash from the Financial Services Authority (FSA) and its own trade body.

Lloyds's move follows last Friday's announcement by the British Bankers' Association (BBA) to seek a judicial review to stop the regulator, the FSA, forcing lenders to review millions of PPI sales.

The FSA's demands would lead to mass compensation for up to three million mis-selling victims, which could top 2 billion (see the PPI Reclaiming guide).

The regulator stated on Friday that banks must continue to handle complaints until the legal process ends. The banks' trade body, the BBA, adds that banks cannot choose which complaints go on hold.

Lloyds could yet be joined by fellow rebels. Barclays says it is reviewing its PPI complaints processes. HSBC says it will continue to deal with official protests but is "liaising with the FSA on how to handle complaints".

Royal Bank of Scotland says "banks are discussing how best to handle complaints whilst the review is ongoing". In contrast, Santander says it will continue to hear PPI complaints.

Banks and other lenders have been mis-selling PPI, designed to cover loan and credit card payments if you cannot work, on a massive scale for years.

In the last five years, there have been more than a million complaints made to firms about PPI, while the FSA has taken action against 24 companies in that time and issued numerous warnings about mis-selling.

Defiance

A Lloyds spokeswoman says: "We will stand by any settlements that have already been made to customers. The court case will not affect those offers.

"However, while the court is considering the issues raised by the BBA, any PPI sales-related complaints will be on hold until further notice. This decision was taken in full consultation with the BBA."

This story first surfaced on our forum earlier today after disgruntled complainants were told by Lloyds staff their claims were on hold.

Lloyds's statement is in defiance of the FSA's stance.

The regulator said on Friday: "In the interests of consumers, firms will be expected to continue handling complaints while this process is ongoing."

It is understood the FSA could take action against banks that don't follow those guidelines.

Meanwhile, a BBA spokeswoman says: "The only people who can put complaints on hold are the FSA, the Ombudsman or the courts."

Bank charges claims were put on hold in July 2007 pending the result of the historic case into overdraft fees, which banks won.

But that action was permitted by the FSA, the Ombudsman and the courts.

What can consumers do?

The Financial Ombudsman Service, the independent arbitrator, is still hearing complaints. You must complain to your bank first and wait until a firm rejection, or if the issue has not been resolved within eight weeks, before involving the Ombudsman.

A whopping 81% of consumers who complain to the Ombudsman on PPI win their case. Yet only an average of 5% of rejected complainants, across all product sectors, take their case to the arbitrator.

MoneySavingExpert.com comment

Martin Lewis, MoneySavingExpert.com creator, says: "This is an outrage. The bank charges reclaiming hold was ordered by the courts and agreed with by the FSA this is something quite different.

"This type of action is like a black-hatted cowboy riding into town, whooping and yelling, and pretending they're untouchable. It's time for the FSA to polish up its sheriff's badge, kick in its spurs and shoot them down.

"We know 81% of people who go to the Ombudsman with PPI complaints win. We know there has been systemic mis-selling.

"What we need to see now, after the charade of the bank charges technicality, is the institutions of state provide real justice for the millions who've been mis-sold billions worth of PPI."

Further reading/Key links

Ombudsman guide: Financial Fight Back
Reclaim mis-sold debt insurance: PPI Reclaiming
Other issue-specific reclaim guides: Bank Charges, Credit Card Charges, Direct Debits, Setting Off, Mortgage Arrears, Endowment Mis-selling