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* Discussions with banks at an early stage - source
* BBA says in talks with FSA about PPI
* FSA says considering a range of options
By Matt Scuffham and Rosalba O'Brien
LONDON, Jan 16 (Reuters) - Britain's financial regulator isconsidering putting a deadline on bank customers claimingcompensation for being mis-sold insurance on their borrowings,sources familiar with the matter told Reuters.
The Financial Services Authority and UK banks are looking atways to tackle the spiralling cost of compensating customersmis-sold payment protection insurance (PPI). Industry sourceshave said the total bill could be 25 billion pounds ($40billion) and take banks several years to clear as claims fromcustomers and their agents such as dedicated claims managementcompanies continue to pour in.
With each billion pounds paid out in PPI compensationcutting the amount banks can lend in real terms by 10 billionpounds, the industry has lobbied regulators to put a limit onhow much longer customers can have to make claims. But one ofthe sources stressed that the talks were at an early stage.
"It is far from a done deal", the source said.
The Times newspaper said on Wednesday that the BritishBankers Association had suggested a deadline of next summer inreturn for the banks agreeing to finance a widespreadadvertising campaign to ensure people are aware that they onlyhave a limited time to make a claim.
The BBA confirmed on Wednesday that it was holding talksover PPI with the Financial Services Authority.
"The ongoing work focuses on three issues as a priority:addressing backlogs, making sure that customers can be confidentthat the offers they receive are right and highlighting thatthere is no need for them to engage a claims managementcompany," the BBA said in a statement.
Banks have so far set aside more than 12 billion pounds todeal with the biggest mis-selling scandal in British history andare struggling to cope with a mounting backlog of complaints.
The policies were meant to protect borrowers who foundthemselves out of work because of sickness or redundancy butwere found to have often been sold to customers who did not wantor need them.
Last week, the Financial Ombudsman Services, which steps inwhen banks and their customers can't reach a settlement, said itwas currently receiving 5,000 PPI-related complaints each weekand was recruiting 1,000 new staff to process them.
The FSA said it was looking at ways to deal with theunprecedented level of claims.
"We have considered a number of options and continue to doso. PPI is an ongoing and high-profile issue and we aremonitoring it closely," the regulator said.
Typically Lloyds Banking Group has an army of 6,000workers processing claims and has put aside 5.3 billion poundsfor compensation.
Banks are also co-operating more with claims managementfirms to process the claims, despite their public criticism ofthe companies, which have been urging borrowers to claim.
