* January compensation up 22 pct on month before
* Payouts had fallen in November and December
* Barclays says rate of claims decline lower than expected
* Barclays writing to holders of 750,000 policies
By Matt Scuffham
LONDON, March 8 (Reuters) - British banks paid out more to compensate customers mis-sold loan insurance in January than the month before, reversing a declining trend and pointing to a higher final bill than banks have so far allowed for.
The Financial Services Authority (FSA) said on Friday banks paid out 439 million pounds ($661 million) in January to customers wrongly sold payment protection insurance (PPI), up 22 percent on December and the first rise since October.
The payouts brought the industry's bill so far to 8.9 billion pounds. PPI was meant to protect borrowers against sickness or redundancy, but was often sold to customers who didn't want or need it, or who were ineligible to claim.
Banks have so far set aside 14 billion pounds to compensate customers and industry sources have said they think the final bill could top 20 billion.
Natalie Ceeney, who is dealing with complaints as head of the Financial Ombudsman Service, this week told Reuters banks could be paying out to customers for years to come.
PPI has become the biggest mis-selling scandal to hit UK banks and they have repeatedly underestimated the scale of the problem. Britain's biggest retail bank, Lloyds Banking Group Plc , has set aside 6.8 billion pounds for PPI compensation. Barclays Plc has set aside 2.6 billion and RBS has provisioned 2.2 billion.
RATE OF DECLINE
In its annual report on Friday, Barclays said it had processed 1.1 million claims from customers. It said the number of complaints it received had declined since its peak in May 2012, but the rate of decline had been less than expected.
In addition to the 1.1 million complaints received, Barclays said it had, at the request of the FSA, began writing to holders of a further 750,000 policies. It had written to holders of 100,000 policies by the end of December and expects the remaining letters to be sent by the end of June.
Barclays said it had paid out on about four out of 10 complaints received and the average compensation per claim was 2,750 pounds.
The ombudsman, which settles disputes where banks and their customers cannot reach agreement, said on Tuesday it had received nearly 38,000 PPI complaints against Barclays in the second half of 2012 and upheld 77 percent in favour of the consumer.
Data from one bank and industry sources on Thursday showed the banks had still profited from PPI sales.
Top bank executives held a conference call on Thursday to discuss whether to continue pressing the FSA to set a deadline on when customers can make PPI claims.
The call ended without a firm decision and talks will resume in coming weeks, a person involved in the discussions said. Banks want to cut off claims by April 2014, which the regulator has said it will consider, but executives have told Reuters they are pessimistic about their chances of success.