Millions of people who were sold dodgy insurance by banks, high-street stores and car dealers could be due compensation of more than £10 billion in what is being described as the biggest scandal since mortgage endowment mis-selling.

The Financial Services Authority (FSA), the City regulator, last week slapped a record £610,000 fine on GE Capital, which runs the store cards of chains such as Debenhams and House of Fraser, over the sale of so-called payment protection insurance (PPI).

This is supposed to cover your mortgage, card or loan if you are unable to work because of accident, sickness, or you lose your job, but it is expensive and riddled with exclusions.

The move against GE was part of an investigation by the FSA that is expected to result in fines for other big companies. Insiders say that high-street banks such as Lloyds TSB could be next on the hit-list, possibly before the end of this month, opening the floodgates to millions of compensation claims.

Simon Burgess, the managing director of British Insurance, said: “Around half of the 28m PPI policies in place could have been mis-sold, and if claims are upheld it could cost this sector in excess of £10 billion.”

About 7m PPI policies are sold every year by banks, building societies and other providers of loans, mortgages and credit cards in an industry worth £5.5 billion. High-street stores and car dealers also push the cover to customers.

It is one of the last big money-spinners for the banks: Lloyds TSB and Alliance & Leicester are thought to make about 14 per cent of their profits from the sale of the policies, according to Credit Suisse First Boston, an investment bank. PPI is also highly lucrative for Northern Rock, Barclays and Halifax.

The insurance can increase the cost of your loan by thousands of pounds. Royal Bank of Scotland came out most expensive in a survey of 10 major lenders by British Insurance. PPI will add £3,586 to the cost of a £10,000 loan over five years.

However, many policies exclude conditions such as back pain and stress and do not pay out if you are self-employed.

Policyholders often fail to realise they are excluded until they come to claim because the small print is rarely explained at the point of sale, even though the cover has one of the poorest payout records in the industry: only 20 per cent of premiums are paid out in claims compared with 80 per cent for car insurance.

Lisa Green, 25, unwittingly took out PPI when she bought clothes on Littlewoods’ website on interest-free credit.

She was shocked when, a few months after opening her account, she looked at her statement and discovered that she was paying £6 a month for something called Extra Care Advantage. When she phoned Littlewoods to ask what this was it turned out to be PPI and she cancelled it immediately.

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