Consumers were today set for a multi-billion pound compensation payout after banks lost a High Court challenge over controversial payment protection insurance.
In what was described as a "huge victory" for customers, the banking industry lost its claim that new rules on mis-selling PPI should not be applied retrospectively.
But in defiance of the Financial Services Authority, the banks said they would continue to refuse to handle some PPI claims until they had decided whether to appeal the decision.
The British Bankers' Association brought the action against the FSA and the Financial Ombudsman Service over new rules which came into force in December, and aim to ensure consumers are treated fairly, both when they buy PPI and when they complain about being mis-sold the cover.
But the regulations not only applied to policies that were taken out after December, but also to ones that were bought before the new regime was introduced.
Today's ruling paves the way for around three million people to receive compensation for being mis-sold the cover.
The FSA estimates PPI providers will have to pay out up to £1.3 billion in compensation for new complaints that are received during the coming five years, and up to £3.2 billion as a result of reviewing previous PPI sales and pro-actively contracting customers to offer them redress.
The British Bankers' Association expressed disappointment at the outcome.
A spokesman said: "We are disappointed with today's judgment and now need to consider the details of it very carefully as well as next steps, including whether it would be appropriate to apply for permission to appeal.
"Any complaints that are directly affected by the judicial review and therefore cannot be decided will continue to be placed on hold until the next steps have been decided."
But the ruling was welcomed by consumer groups, although they urged the banks not to introduce further delays in paying compensation.
Peter Vicary-Smith, chief executive of Which?, said: "Today's announcement is a huge victory for consumers.
"Instead of dealing with mis-selling, the banks are trying to wriggle out of paying up using the courts - this now has to stop."
Martin Lewis, creator of MoneySavingExpert.com, said: "The banks have behaved abominably. The hold has not been agreed by the FSA or Ombudsman, who have both lambasted it."
He called on the FSA to introduce a credible threat to banks that refused to handle the complaints, by warning them that their licence to do insurance business could be suspended until they processed them.
The FSA also welcomed the decisions and stressed that no waiver was in place allowing banks to put off handling complaints.
It said: "Our primary aim has always been to get proper redress, once and for all, for those with genuine complaints.
"We believe this decision signals the end of years of poor complaint handling and will trigger a dramatic improvement in the way customers are treated when complaining."
PPI covers debt repayments if the holder is unable to work due to an accident or illness or if they lose their job.
But a study by Citizens Advice found it had been mis-sold to some consumers who would never be able to claim on it, while other research found many people felt pressurised into taking it out alongside a loan or credit card and some people did not even realise they had bought it.
The insurance is currently the single most complained about product to the Financial Ombudsman Service, which has received more than 200,000 complaints on the issue and finds in favour of consumers in three-quarters of cases.Reuse content