LYG Lloyds Banking Group Plc

By Max Colchester 

LONDON--A U.K. regulator proposed to put a deadline on a multibillion U.K. bank customer compensation program in 2019, a year later than planned.

The Financial Conduct Authority said Tuesday that banks who had sold customers insurance they didn't need would continue compensating people until June 2019. So far banks have forked over GBP24.5 billion ($32.34 billion) to people who bought the insurance product, known as Payment Protection Insurance.

PPI was sold to cover mortgage, auto and other loan payments if the borrower lost a job or fell ill. Many people didn't need the insurance or could actually claim on it. U.K. bank shares dropped in morning trading Tuesday amid investors' concerns that banks will have to put aside hundreds of millions of pounds to cover the extra compensation. Lloyds Banking Group PLC, for instance, only provisioned for the claims until mid-2018.

Lloyds said it was "disappointed" that the deadline won't come into force until 2017 adding that its guidance for provision remained unchanged.

For years banks have lobbied regulators to stop the vast payouts. Last year the FCA said the deadline could be at the end of 2018, but this has now been pushed back. The FCA on Tuesday confirmed it will put in place a time bar but will continue to consult on how it should be applied. A final decision is expected in October.

"Putting a deadline on PPI complaints will bring the issue to an orderly conclusion," said Andrew Bailey, chief executive of the FCA.

Banks will also have to payout extra compensation for not being transparent about the commissions involved in product sales. A supreme court ruled in November 2014 that a loans company unfairly sold a PPI policy because it didn't disclose the large commission it and a broker received.

A rule on how that compensation will be paid out will be outlined by the end of the year and implemented by March 2017. An ad campaign will herald the deadline which would then come into force end of June 2019.

Such is the scale of the payouts that some economists credited it with bolstering the U.K.'s economy and boosting household spending on items like cars and vacations. It also created an industry with thousands of people employed by claims management firms who offer to file complaints on customers' behalf.

Write to Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

August 02, 2016 05:04 ET (09:04 GMT)

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