Barclays has set aside £1 billion (€1.13 billion) to compensate consumers who were wrongly sold insurance, as British banks as a whole backed down in the fight against accusations of mis-selling.

In a fresh blow to an industry already under pressure from UK regulators to clean up its act following the financial crisis, banks said they would not appeal against a ruling requiring them to compensate people for mis-selling payment protection insurance (PPI).

Analysts have said the case could cost banks around £8 billion.

"In the interest of providing certainty for their customers, the banks and the British Bankers' Association (BBA) have decided that they do not intend to appeal," the BBA said in a statement.

Barclays said it would make a £1 billion provision in the second quarter of 2011 to cover the cost of "future redress and administration" related to PPI mis-selling.

The hit to Barclays comes after rival Lloyds last week unveiled a shock 3.2 billion pound charge to cover compensation as it became the first to back down after years legal of wrangling.

Barclays shares were down 0.8 per cent in early morning trade, broadly in line with a 0.6 per cent drop in the European banking sector.

"This is another negative for the banking sector. It means even more costs for the banks, which were already facing mounting costs on their capital structures," said John Smith, fund manager at UK investment firm Brown Shipley.

Banks also face higher costs from plans by a government-appointed commission to make them hold more capital and form separate subsidiaries for their retail and investment banking operations, an effort to better protect retail customers and shield the banks in the event of another financial crisis.

Bank overdraft fees also remain in the spotlight after being criticised for being opaque by Business Secretary Vince Cable and parliament's Treasury Select Committee.

The payment protection insurance policies were typically taken out alongside a personal loan or mortgage to cover repayments if customers fell ill or lost their jobs.

But the policies were sold to self-employed or unemployed people who would not have been able to claim and to consumers who did not realise they were taking out a policy, and last month a court ruled the banks were at fault.

Barclays said it had agreed with the Financial Services Authority (FSA) regulator to contact customers and to assess the situation.

"We don't always get things right for our customers; when we get them wrong, we apologise and put them right," Barclays chief executive Bob Diamond said in a statement.

Royal Bank of Scotland (RBS) said last week it was too early for it to estimate the possible impact but said settling claims could be "material".

Bank of America has also raised its provision for mis-selling to $650 million from an original $592 million, while HSBC said it would take a $440 million provision on its PPI exposure.

Deutsche Bank analysts have said RBS could face a £1 billion provision on the PPI mis-selling.

Spain's Santander had not challenged the findings of regulators and has already been paying compensation.

Reuters