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* Banks demonised claims firms in compensation battle * Now they are seeking to cooperate * Bill could reach 25 billion pounds ($40 billion By Matt Scuffham MANCHESTER, England, Jan 13 (Reuters) - The boss ofBritain's biggest retail bank struck a chord with the publicwhen he complained of getting unsolicited calls from claimsmanagement firms promising him compensation from his own andother banks. But while people share his irritation with calls and textmessages about fantastic sums from claims they have not made,more and more are turning to claims management firms to helpreturn billions tricked or bullied from them by the banks. Facing a huge backlog of claims from the biggest mis-sellingscandal in British banking history, the country's lenders arebeginning to turn to claims firms for help themselves, insteadof treating them as enemies. It is a far cry from last year, when Lloyds' ChiefExecutive Antonio Horta-Osorio summed up the mood of manybankers by accusing the firms of fueling bogus claims, pointingto the irony of their calls to his own phone. Horta-Osorio said one in four cases from firms claimingcompensation for unwanted or unsuitable payment protectioninsurance (PPI) -- meant to protect borrowers who lost jobs orbecame ill -- did not even have a PPI with Lloyds. "We have to stop this," he said. "It's fraud." The tables were turned by figures from the country'sFinancial Ombudsman Service showing that Lloyds lost 98 percentof cases referred to the service in the year to March 2012, theworst record of any bank, compared with just 18 percent atBritain's biggest building society, Nationwide. Now claims firms report a more cooperative atmosphere as thebanks, which face a bill likely to far exceed the 12 billionpounds ($19 billion) they have already set aside, seek to savecosts and restore their battered reputations. Craig Lowther, founder of claims company Money Boomerang,said it had been approached by several banks looking to speed upthe process of dealing with claims and avoid the extra cost ofreferrals to the Financial Ombudsman Service. "We're starting to see some lenders approaching us with theidea of working in a smarter way," Lowther, 41, said in aninterview at Money Boomerang's offices in Manchester, England. PPI is by far the most costly of a string of scandals tohave hit Britain's banks, including interest rate rigging,breaches of anti-money laundering requirements and the mis-saleof complex interest rate hedging products to small firms. One senior bank executive told Reuters he expected a totalbill for the industry of 25 billion pounds for mis-sold PPI,while the Bank of England has said up to 10 billion pounds moremay need to be set aside on top of current provisions. The claims industry has grown around this honeypot,attracting criticism not just for the aggressive marketing, butfor taking big slices of compensation from people who could keepit all if they complained directly to their banks. FLOODGATES Under the new arrangements, Lowther said his companyfast-tracks its strongest cases to lenders and flags upunresolved cases it is about to refer to the Ombudsman in a"search-and-destroy" process that also sees it dumpingillegitimate claims. This helps banks cut back processing costs and avoid the 900pounds ($1,400) they are charged when cases are referred. Witheach billion pounds paid out in PPI cutting the amount banks canlend in real terms by 10 billion pounds, speeding up paymentsalso helps end investor uncertainty over the impact of the bill. Lowther said one bank, which he declined to name, hadentered similar arrangements with around a dozen claims firms. Several major banks contacted by Reuters all stressed theydealt with all claims equally and at the same pace. Declining to be quoted by name, one said it was prepared towork with reputable claims firms to process legitimate claimsquickly but was wary of unscrupulous operators. Another said ithad "stepped up its engagement" with claims firms in the past 12months because of a "very significant" increase in complaints. PPI is the most complained about product ever in Britain,with the Ombudsman receiving its 500,000th case last October.The second highest is mortgage "endowment" insurance policies,about which 350,000 complaints have reached the Ombudsman. Lloyds opened the floodgates to a wave of claims when it setaside 3.2 billion pounds for PPI compensation payouts in May2011, after Britain's banks had lost a landmark court case. Lloyds, which has an army of 6,000 processing claims, hasincreased the amount to 5.3 billion, the highest in theindustry, and analysts expect there is more to come. It says it deals with all complaints at the same speed,acknowledging it had problems distributing compensation paymentsto customers at the end of 2011. "We are confident that more current data will highlight thesignificant investment we have made in our PPI complaintshandling processes," a Lloyds spokesman said. NO CHAMPION The Justice Ministry, which regulates more than 3,000 claimsmanagement firms in the UK, says the industry does not alwayslive up to the image it projects of consumer champion. "Too often consumers are treated simply as a commodity andtheir claims for mis-sold products and the like are presented tolenders in a commoditised format," the Justice Ministry's ClaimsManagement Regulation Unit said in its annual report. It said firms handling PPI claims increased their turnoverby 66 percent to 313 million pounds in the year to Mar. 31,2012, a number thought to have grown significantly since. On Thursday, the ombudsman said it was taking on 1,000 newstaff to deal with an unprecedented level of complaints; lastyear it said they had reached up to 400 an hour. Money Boomerang, which takes a hefty 25 percent slice ofcompensation payments, rejected accusations that firms like hisare to blame for the spiraling cost of compensation. "To say that it's all the fault of big bad claims managementcompanies is a misnomer," said Lowther who previously providedlegal services to ex-miners who had contracted illnesses. "They (the banks) created the mess and they haven't done agood job of clearing up the mess." The ombudsman has said that less than 4 percent of theclaims it dealt with were thrown out because the customer didnot have a PPI agreement with the lender. It ruled in favour of the consumer in more than four out offive of the remaining cases and said there was no difference inthe uphold rate between claims brought by individuals and thosebrought by claims firms. Most claims are paid by banks, ordropped, before they reach the ombudsman. Speaking in the hub of Money Boomerang's operations, where65 staff sift through a backlog of 30,000 live cases, Lowthersaid his firm searches through 15 years of a clients' financialhistory, uncovering an average of 2.1 cases for each claimant. "If we advertise on TV it's expensive, we don't cold call,we don't text, we spend a lot of money, we've got an in-housecompliance. All of that costs money and that's why we charge 25percent," he said. Lowther says the payouts, which average 2,750 pounds percase, are treated as an unexpected bonus by many customers andused for one-off purchases like holidays and home improvements. Nigel Walker, a 41-year-old television engineer from southLondon, was awarded 3,000 pounds ($4,800) in compensation fromBank of America's MNBA, and Halifax, part of Lloyds,and does not regret giving up 20 percent in commission to aclaims management company. "I suppose I could have had the whole 3,000 pounds if I'dclaimed myself but, the point is, I would never have done it offmy own bat."