UPDATE 1-UK may set deadline for insurance compensation claims

* Lenders have paid out 17 billion pounds compensation

* Banks have set aside 24 billion pounds for payouts

* FCA to assess if current approach is working

* Banks have dealt with 14 million complaints (Recasts, adds comment from consumer group, background)

By Huw Jones and Matt Scuffham

LONDON, Jan 30 (Reuters) - Britain's markets watchdog willconsider imposing a deadline on customers claiming compensationfor the mis-selling of loan insurance, potentially drawing aline under the country's costliest consumer finance scandal.

The Financial Conduct Authority (FCA) said on Friday itwould collect evidence on whether consumers mis-sold paymentprotection insurance (PPI) were being compensated properly anduse it to assess whether the current approach was working.

Lenders have so far paid out 17.3 billion pounds ($26billion) in compensation, the FCA said, and expect the totalbill to rise further.

The insurance policies were meant to protect borrowers inthe event of sickness or unemployment but were often sold tothose who would have been ineligible to claim.

Banks have pushed in the past for a 'time-bar' to be placedon claims but their lobbying failed because the regulatorinsisted that they needed to prove such a move would be in theinterests of consumers, industry sources said.

The FCA said it would use its findings, due to be publishedin the summer, to assess if the current approach to compensatingcustomers was working properly.

"The FCA will then consider whether further interventionsmay be appropriate, which could include a consumer communicationcampaign; a possible time limit on complaints; or other rulechanges or guidance," it said in a statement.

The FCA board decided on Thursday to review how compensationwas being paid given that lenders have been dealing withcomplaints for several years.

Banks such as Lloyds, Barclays, HSBC and Royal Bank of Scotland have already setaside 24 billion pounds to compensate consumers.

The FCA said that since January 2011, banks have handledover 14 million complaints over PPI and have paid compensationon more than 70 percent of those complaints.

Consumers who believe they were mis-sold a PPI policy shouldcontinue complaining to whoever they bought it from and to theFinancial Ombudsman if they are not satisfied with the response,the FCA said.

The Financial Ombudsman said on Tuesday the number ofcomplaints about loan insurance fell in the fourth quarter of2014, but were still running at around 4,000 a week.

Consumer group Which? welcomed the FCA's intervention.

"People shouldn't be forced to take their complaint to theFinancial Ombudsman, or use unscrupulous claims managementcompanies," said Executive Director Richard Lloyd.

($1 = 0.6641 pounds) (Editing by David Holmes and Mark Potter)