Complaints over mis-sold insurance by UK banks decline

* PPI complaints fall to 205,000 from 400,000 year before

* Banks have so far set aside 26 bln stg for compensation

LONDON, May 19 (Reuters) - Complaints to Britain's financial ombudsman about the mis-selling of loan insurance nearly halved in the past year, suggesting a scandal that has cost banks over 26 billion pounds ($41 billion) may be coming to an end.

The ombudsman, which steps in when financial services firms and their customers can't reach agreement, said complaints about payment protection insurance (PPI) fell to 205,000 in the year to March from 400,000 the year before.

The policies were meant to protect borrowers in the event of sickness or unemployment but were often sold to customers who didn't require them, or who would have been unable to claim.

The ombudsman said it resolved 448,000 cases of all types during the year, compared with 488,000 the year before. More than half of the cases were settled in favour of the customer.

"Our focus continues to be on complaints prevention and sorting things out pragmatically as soon as problems emerge," said Chief Ombudsman Caroline Wayman.

Lloyds Banking Group has so far set aside 12 billion pounds to deal with PPI complaints, more than any other bank. Barclays (LSE: BARC.L - news) , Royal Bank of Scotland (LSE: RBS.L - news) and HSBC have also set aside billions of pounds.

($1 = 0.6374 pounds) (Reporting by Matt Scuffham; Editing by Mark Potter)