Banks and other lenders have been ordered by the Financial Services Authority (FSA) to compensate customers to whom they mis-sold Payment Protection Insurance (PPI).

In the first instance only lenders who were responsible for the 40 per cent of PPI policies that were sold to customers taking out unsecured loans. These firms were selling "single-premium" PPI policies.

Lenders who offered PPI when taking out a secured loan or credit cards will also be asked to compensate their customers.

PPI policies are supposed to cover the costs of customer’s loans in the instance that they are fall ill or are made redundant.

However, many complaints have been made due to the very specific small print which often excludes many customers who were uninformed of this.

All PPI providers will be asked to reopen complaints that were rejected previously, of which there are more than 185,000.

The FSA revealed that PPI providers had been rejecting over 60 per cent of complaints, with around 16 per cent of these going to the Financial Ombudsman Service (FOS) who declared that many justified complaints had been rejected and customers fobbed off. They upheld over 80 per cent of complaints that reached the FOS.

Many customers complained that it was very difficult to get a policy cancelled once it was taken out and many customers were unaware they had even taken it out alongside a loan.

Jon Pain, the retail managing director at FSA, has called the order a last chance for PPI providers.

“The outcome of a complaint about a PPI sale should not depend on whether or not the complainant persists past the firm on to the FOS.

This is the last chance for the industry to show that it can act fairly, consistently and in the best interest of consumers on PPI.”

The FSA has estimated that around £195 million will be refunded in compensation payouts to customers.