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Hundreds of thousands of claims for compensation for mis-sold loan insurance will be put on hold for months until a legal wrangle is over.

Banks will delay old claims relating to the sale of payment protection insurance (PPI), the British Bankers' Association has announced.

These cases will only be completed at the conclusion of a judicial review into the issue, it said.

PPI insures people's loan repayments if they fall ill or lose their jobs.

Sales of PPI topped the list of complaints considered by the Financial Ombudsman in the last financial year.

New rules

In August, the Financial Services Authority (FSA) announced a crackdown on the way banks have been dealing with complaints about mis-sold PPI policies.

The City watchdog stipulated, among other things, that banks and other lenders will have to review old complaints about the mis-selling of PPI. It ordered banks to adopt new rules that are due to come into force on 1 December.

The FSA expects its new rules to force the financial services industry to deal with 2.75 million cases, and that claimants could be refunded as much as £2.7bn.

But the British Bankers' Association (BBA), which represents the High Street banks, called the new rules "illegal and retrospective" by applying new standards to old sales. It recently announced it was seeking a judicial review.

Now, the BBA has said that any cases which could be affected by the outcome of this judicial review - which might not be heard in the High Court until early next year - will be put on hold.

"Where the the assessment of the complaint would not be affected by the judicial review, these complaints will be handled in the normal way," the BBA said in a statement.

"If your complaint will be impacted by the judicial review, and cannot be resolved at this point, then your bank will write to inform you."

A spokesman said the FSA's rules allowed these cases to be put on hold until the case was over. He said there had been no application for a waiver - similar to the official hold on cases put in place during the recent legal arguments over unauthorised overdraft charges.

However, the move is likely to add an extra dimension to the dispute, with the FSA saying last week that "firms will be expected to continue handling complaints while this process is ongoing".

And complainants would still be entitled to take their case to the Financial Ombudsman Service (FOS) if the bank has not dealt with it within eight weeks of the initial complaint - even if the case is on hold.

Row

The BBA has not, so far, spelled out the detail of its objections to the FSA's forthcoming rules.

But the ����ý has learned that the banks believe the FSA is acting beyond its powers in demanding that they offer compensation to customers for past mis-selling under its general rules, known as the Principles of Business Sourcebook.

The banks argue that a breach of the rules, for instance on the handling of complaints, does not allow private individuals to sue for compensation.

As such the banks argue that they have "no legal liability" to customers even where the general principles may have been broken, and therefore the FSA cannot demand they pay compensation.

They also argue that past cases should be judged against the requirements of the rules that applied at the time the policies were sold, specifically the Insurance Conduct of Business Sourcebook from January 2005 and its successor rules which applied from January 2008.

"The BBA is working with the FSA and the Financial Ombudsman Service to ensure that these matters are resolved as swiftly and fairly as possible," the BBA said.

"The industry felt that there was no alternative but to go to judicial review, as discussions with the FSA and the FOS have not enabled the issues to be resolved."