The High Court today ruled banks must look again at hundreds of thousands of PPI cases, following an unsuccessful judicial review by the British Bankers Association (BBA) against the FSA.
It could lead to billions in payouts to consumers who had been missold the policies.
The BBA had launched a judicial review after the FSA said banks would have look again at complaints it had previously rejected.
Earlier this year, the BBA's legal team had told the High Court implementation of the FSA's proposals could cost the banks £3.2bn and it is estimated up to three million people could be affected by the decision.
Following the ruling, the BBA said: "We are disappointed with today's judgment and now need to consider the details of it very carefully as well as next steps, including whether it would be appropriate to apply for permission to appeal.
"Any complaints that are directly affected by the judicial review and therefore can not be decided will continue to be placed on hold until the next steps have been decided.
"We will continue to work closely with the FSA to ensure that all complaints are appropriately handled and customers are not disadvantaged."
The Financial Ombudsman Service has previously warned it could be overwhelmed by PPI complaints as it is currently receiving around 5,000 cases per week.
Despite warnings from the FSA, a number of PPI sellers were refusing to co-operate with the FOS until the outcome of the judicial review.
Reacting to the ruling, the FSA said: "Our primary aim has always been to get proper redress, once and for all, for those with genuine complaints.
"We believe this decision signals the end of years of poor complaint handling and will trigger a dramatic improvement in the way customers are treated when complaining."
