UPDATE 1-UK banks forced to re-open 2.5 million insurance mis-selling cases

* Banks to review complaints received in 2012 and 2013

* Industry has so far paid out 16 billion pounds (Adds comments from FCA Chief Executive Wheatley)

By Matt Scuffham

LONDON, Aug 29 (Reuters) - Britain's financial regulatorsaid banks and other financial services companies had agreed tore-open two and a half million loan insurance mis-sellingcomplaints from 2012 and 2013 to make sure fair compensation waspaid.

The Financial Conduct Authority said on Friday the industryhad so far paid out 16 billion pounds ($27 billion) tocompensate customers mis-sold payment protection insurance(PPI), from 22 billion pounds set aside to deal with Britain'smost expensive consumer scandal.

The policies were meant to protect customers who fell ill orlost their jobs but were often sold to those who didn't needthem or would have been ineligible to claim.

The FCA said it was not satisfied that all PPI complaintsreceived by banks in 2012 and 2013 had been treated fairly afterthe number of cases being won by customers fell. It said bankshad subsequently agreed to review cases which may have beenunfairly rejected or where too little compensation may have beenpaid.

"Making sure anybody previously mis-sold PPI is treatedfairly now, and paid redress where it's due, is an importantstep in rebuilding trust in financial institutions," said theFCA's Chief Executive Martin Wheatley.

"In around two and a half million complaints this was notnecessarily the case so, at our request, firms will be lookingat these complaints again."

Lloyds, Barclays and Royal Bank ofScotland increased the amounts they had set asidealongside their first-half results.

$1 = 0.6025 British Pounds) (Reporting by Matt Scuffham; Editing by Simon Jessop and LauraNoonan)