Citizens Advice says consumers could be thousands of pounds out of pocket, and even more distrustful of banks, because of Lloyds rejecting PPI claims first time.
An investigation by The Times found staff at a Lloyds PPI complaints handling centre were advised that most customers would give up if the claim was not successful first time. Lloyds has since terminated the contract of the company responsible for running the claims unit and is retraining staff.
Citizens Advice Chief Executive Gillian Guy said: “The scale of PPI mis-selling was of pandemic proportions.
It is absolutely appalling that Lloyds has not taken its commitment seriously to compensate customers. As a result consumers yet again have lost out on thousands of pounds that was rightfully theirs.
City regulator the Financial Conduct Authority has warned firms to comply with its rules and treat customers fairly.
It comes after Lloyds Banking Group admitted "issues" with the handling of customers' payment protection insurance complaints.
The FCA has previously said that it was looking into PPI firms' complaint-handling procedures and it plans to publish its findings later this summer.
An FCA statement said: "We expect all firms to comply with our rules and treat their customers fairly.
Firms know that PPI complaints must be thoroughly investigated and that appropriate action, where required, is taken promptly.
– FCA statement
Our rules are very clear that firms are expected to learn from previous complaints. So if there are significant numbers of complaints coming in about the same thing, that is a clear warning sign that something isn't right.
– FCA statement
The FCA said it is aware of the issues raised by TheTimes and it has been working with Lloyds since earlier this year to ensure they are resolved and customers' interests are properly considered.
A spokesman said the centre is now being run by a new supplier, and staff are undergoing re-training.
This site was operated for us by a third party supplier, Deloitte. Following further investigations, we took immediate action, and in May concluded our contract with Deloitte and moved to a new supplier.
Some of the comments made by trainers to The Times reporter are not endorsed by Lloyds Banking Group and we believe they do not reflect our high training standards or our policies. We believe the comments to be isolated and they are now being addressed.
Following the discovery of these issues, and under the guidance of a new supplier, the employees are currently undergoing re-training in line with our policies and procedures.
To date Lloyds has set aside a total £6.7 billion for PPI payouts, and has paid out more than £4.3 billion to 1.3 million customers.
Lloyds Banking Group has admitted "issues" with the handling of customers' payment protection insurance (PPI) complaints, following allegations that staff were told to ignore possible fraud.
An investigation by The Times claimed that contractors employed at the group's PPI complaint handling centre were coached on how to forge information and advised that most customers would drop their complaint if rejected the first time.
The newspaper sent an undercover reported to train with the company as a PPI complaint handler.
A spokesman for Lloyds said the company has terminated its contract with Deloitte, which operated the complaint handling centre on its behalf:
"Earlier this year we became aware of issues at a PPI complaints handling centre called Royal Mint Court in central London."