* 5,000 PPI complaints coming in each week
* Expects PPI complaints to continue for next few years
* Struggles to match pay offered to PPI staff by banks
* Raises referral fees for banks by 50 pounds per case
* Rise in complaints about payday loans, packaged accounts
By Matt Scuffham
LONDON, Jan 10 (Reuters) - Britain's financial ombudsman service is taking on 1,000 new staff this year to deal with a growing backlog of complaints over mis-sold loan insurance, which have far exceeded its expectations.
The service, which steps in when banks and their customers cannot reach an agreement, said on Thursday it was getting over 5,000 cases a week but resolving only about 3,500, leaving it with a backlog of a quarter of a million outstanding complaints.
Banks have set aside more than 12 billion pounds ($19 billion) to compensate customers wrongly sold payment protection insurance (PPI) following the worst mis-selling scandal in British history.
Deputy Chief Ombudsman Tony Boorman said many financial institutions were not dealing effectively with claims and were subjecting their customers to "delays and inconvenience".
"It's disappointing that we're still seeing significant numbers of unresolved disputes about mis-sold policies being referred to the ombudsman," Boorman said on Thursday in a report outlining the service's plans for the year ahead.
The ombudsman said it was losing money as a result of the costs of dealing with the complaints and had struggled to compete with the wages offered by banks, which were also recruiting heavily to expand teams dealing with PPI claims.
The ombudsman's latest recruitment drive will bring its total number of case workers up to 3,500, after 1,000 new hires were taken on last year.
To offset that, it is raising fees charged to financial services firms when cases are referred to the ombudsman. The fee will rise by 50 pounds ($80) to 550 pounds. Additional fees charged specifically on PPI cases will be kept at 350 pounds.
Some 245,000 new PPI cases have been referred since last April, 54 percent above the ombudsman's forecast 165,000 for the entire year to March 2013. PPI now accounts for two-thirds of its workload and the ombudsman said it expects to receive about 250,000 new cases in the year to March 2014.
PPI is the most complained about financial product ever in Britain, with the ombudsman receiving its 500,000th case last October. The second highest is mortgage endowments, about which 350,000 complaints have reached the ombudsman.
The policies were meant to protect borrowers who found themselves out of work because of sickness or redundancy but were often sold to customers who did not want or need them.
The ombudsman said the overall levy paid to it by Britain's financial services firms to contribute to its costs will rise to 23 million pounds from 17.7 million previously.
However, the number of cases which institutions are allowed to have referred free of charge has been increased to 25 from 3 previously. The ombudsman said that will ensure the businesses which are most responsible for generating the increased work load contribute the most to sorting it out.
The ombudsman said it expected to continue to receive large numbers of PPI complaints for the next few years. The new staff will be recruited on three-year fixed term contracts, it said.
Away from PPI, the ombudsman said it was seeing more cases about so-called "payday loans". Many customers have complained that the loans are unaffordable or about methods used by lenders to get their money back.
It has also seen an increase in cases relating to "packaged" bank accounts, with customers saying insurance policies provided with their bank accounts are not suitable for their needs.