UPDATE 3-Britain to set 2018 deadline for PPI insurance claims against banks

* FCA says deadline would bring PPI issue to conclusion

* FCA says to launch communications campaign

* Deadline will help end consumer "inertia"

* Banking shares outperform broader stock market (Adds further comment from FCA, market reaction)

By Steve Slater and Huw Jones

LONDON, Oct 2 (Reuters) - Britain's financial regulator saidon Friday it intended to set a 2018 deadline for people to claimcompensation for being mis-sold repayment insurance, drawing aline under Britain's costliest consumer finance scandal.

Over the last five years banks have already set aside morethan 28 billion pounds($42 billion) to meet compensation claimsfrom customers sold payment protection insurance (PPI) policies.

PPI policies were supposed to protect borrowers in the eventof sickness or unemployment but were often sold to people whowould have been ineligible to claim.

But the Financial Conduct Authority (FCA) said on Friday itplanned to introduce a deadline for further PPI claims, as morethan 20 billion pounds has already been paid out to over 10million consumers.

"We take the view that a deadline ... would help bringfinality and certainty in a way that advances the FCA'soperational objectives of securing an appropriate degree ofprotection for consumers and protecting and enhancing theintegrity of the UK financial system," the regulator said.

The British Bankers' Association, which has been lobbyingfor a deadline, had no immediate comment.

The watchdog said it aimed to issue a consultation by theend of the year, and set the deadline two years from the rulescoming into force. The new rules would not come in before spring2016, so consumers will have until at least spring 2018 tocomplain, it said.

Analysts at Citi bank said the deadline may trigger afront-loading of complaints but also greatly reduce uncertaintyfor banks. "We believe this is a positive outcome, with Lloydsset to benefit most," Citi analysts said in a note.

The share prices of UK banks Lloyds, Barclays, HSBC and Royal Bank of Scotland wereall up by 2 percent or more by 1028 GMT, when the FTSE 100 was up 1.6 percent.

Consumer finance commentator and campaigner Martin Lewissaid plans for a deadline were disappointing at a time when mostclaims are still being upheld.

ENDING INERTIA

Normally a deadline of three years is placed on complaintsabout financial products but none was set with PPI as manycustomers were unaware they had bought the product.

The watchdog said that it was an appropriate time to set adeadline as rules on PPI claims have been in place since 2010and surveys showed most people were aware of possiblecompensation.

A deadline could help end some of the "inertia" being seenas some consumers are not bothering to make a claim, the FCAsaid. It could give no figures on potential remaining claims.

A high and growing proportion of PPI claims now go back adecade or more, with the evidence to back them becomingincreasingly "stale" or patchy, the FCA said.

The FCA said that sales of loan insurance fell dramaticallyafter early 2009 and the current rules and guidance about makinga complaint have been in place since December 2010.

PLEVIN JUDGMENT

The regulator also said the time limit would also apply tocomplaints being contemplated following a landmark ruling lastyear by the Supreme Court which suggested there might be anadditional cause for complaint over PPI sales concerning thelevel of commissions paid on the sale.

The court found that Paragon Personal Finance breached theConsumer Credit Act by failing to tell a borrower, Mrs SusanPlevin, that the charge of 5,780 pounds for her PPI policy,which was added to the loan of 34,000 pounds, included acommission paid to Paragon and a credit broker amounting to 71.8percent of the total PPI premium.

If the ruling was found applicable to other PPI sales, banksmay have to pay out billions of pounds more incompensation.

The FCA said it will now consult on rules and guidance abouthow firms should handle PPI complaints in the light of thePlevin judgment.

However it is suggesting that a commission of 50 percent ormore on a PPI sale should be deemed "unfair", with the customerpotentially eligible for compensation, but only if they have notyet successfully claimed for PPI mis-selling.

The average commission was about 67 percent, and redresswould cover the difference between the 50 percent "unfair"threshold and the commission actually paid, the FCA said.

Analysts at Citi said that the proposals to impose the samedeadline on claims related to the Plevin case should alsomitigate the impact of the ruling on the lenders.

"With the onus seemingly placed on the consumer to complain,within a fixed deadline, this should greatly reduce the redressrisk associated with Plevin, in our view," the analysts said. ($1 = 0.6602 pounds) (Editing by Greg Mahlich)