The row arose because lots of customers were sold PPI for their mortgage or loan or credit card despite being ineligible to receive it - and in some cases, without even being told about it. So it may have been a nice little earner for the banks, but there were clearly also some pretty egregious breaches of trust going on. Somehow belatedly, the FSA eventually tightened up the rules (so banks now have to inform customers that PPI is an optional add-on, and can't even try to sell it until at least seven days after the loan is made).
The industry didn't object to that per se, but they argued that they shouldn't be punished for it retrospectively. Unfortunately for them, the courts have so far disagreed - and quite right too. Punishing people retrospectively when laws change is a dangerous game, but in this case, there's surely no question that the banks were in the wrong in the first place - even if the regulatory framework was sufficiently lax for them to get away with it.
Besides, this is surely as much about reputation as the letter of the law. If the industry has been caught bang to rights taking advantage of its customers - particularly at a time when most of the population is less than impressed about their role in torpedoing our economy - the sensible thing to do image-wise is to hold up its hands and cough up the compensation, not fight the case tooth and nail in court.
Clearly Lloyds came to that conclusion, although some think the £3.2bn it has set aside to cover costs is a bit excessive. Barclays has now made a provision of £1bn, and HSBC a provision of £280m, while RBS said it was doing its sums to work out how much it would have to fork out. Their thinking, it seems, is that the most sensible long-term plan is to make this problem go away, by whatever means necessary. A conclusion they should have reached a while ago, if you ask us.