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Firms providing mortgage payment protection insurance (MPPI) have agreed to provide £60million in refunds, after pressure from the Financial Services Authority (FSA).

The authority had raised concerns after some providers increased premiums and reduced the cover provided during 2009 - a year in which rising unemployment made claims more likely.

After several months of negotiations with some firms and industry bodies, the sector will now refund increases in premiums made during 2009 and reverse decisions to cut the cover provided.

Jon Pain, a spokesman for the FSA, said this is a positive move by the MPPI industry, adding: "It will also give all MPPI customers clarity about when and why firms will be able to vary these in future.

"This clarity will provide the basis for MPPI to remain a valuable option for many mortgage customers who wish to take out protection, alongside the mortgage commitment they are taking on."

The Financial Services Consumer Panel welcomed the development. Its chairman, Adam Phillips, said: "This is exactly what a financial regulator should be here for and we applaud the FSA's action. It cannot be right that firms change the terms and conditions of an insurance policy just as times get hard and when people are more likely to try to claim on it."

However, the agreement is for MPPI policies to be frozen for existing customers until at least January.

Phillips added that the consumer panel will be watching to see if customers benefit from a fair deal after that. He warned: 

"Significant changes to cover go against the whole principle of why people pay for insurance and undermine consumers' trust in the industry."

Although payment protection insurance has had a bad press, after widespread mis-selling practices were uncovered, it can be a useful layer of protection for anyone needing to borrow funds.

Source: Money Supermarket