The Lloyds Banking Group has pulled out of the appeal to overturn the High Court ruling on payment protection insurance (PPI).
The surprise move will be a huge blow to other high street banks involved in the appeal and may now have little choice but to follow suit.
Shares in the bank fell 7.7% after it set aside £3.2 billion to repay claims by customers. This sent fears across the market and shares of most other major banks, including Barclays and Royal Bank of Scotland, have since fallen.
Stefan Maryniak, spokesperson at uSwitch.com, says by retreating from the battle, Lloyds has left the other banks with less firepower for the appeal and they could now struggle to prove their case.
"It is admitting its part in the mess and has even set aside over £3 billion to pay for its mistakes. This shows that it is taking it on the chin rather than trying to duck the blow. Considering it stands to lose the most from the PPI decision, its announcement is something of a surprise," he adds.
The Financial Services Authority (FSA) published guidelines last year stating that banks should contact all past PPI customers and invite them to complain if they thought they had been mis-sold PPI. This was challenged by the banks who spent many months trying to overturn the decision until a High Court judge rejected the challenge last month.
António Horta-Osório, chief exectutive at Lloyds, says the money set aside to pay compensation would "draw a line under the issue". The PPI provision was one of the main factors in pushing Lloyds to a first-quarter pre-tax loss for 2011 of £2.47 billion.
This will be an embarrassment to the bank after it made £721 million profit in the first three months of last year. Claims against Lloyds will now be processed having previously been put on hold until the High Court reached a decision.
All other customers of Lloyds, including those of the former HBOS bank, are now being invited to contact the bank if they think they have a claim.
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