UK banks have agreed to set up a scheme to compensate victims of another mis-selling scandal, which could cost them up to £1.3bn.
They will reimburse customers mis-sold card protection and identity theft insurance products by CPP Group.
The Financial Conduct Authority said that customers had been "given misleading and unclear information about the policies".
CPP Group and 13 banks and credit card firms will pay for the compensation.
The new banking regulator, the Financial Conduct Authority (FCA), said that some seven million customers could now expect to receive letters from CPP from 29 August 2013, explaining how to claim compensation.
The banks and credit card companies that have agreed to provide compensation:
- Bank of Scotland
- Barclays
- Canada Square (formerly Egg)
- Capital One
- Clydesdale Bank
- Home Retail Group
- HSBC
- MBNA
- Morgan Stanley
- Nationwide
- Santander
- Royal Bank of Scotland
- Tesco
The banks, whom regulators found culpable of introducing customers to CPP's products, will pay money into the scheme as the claims are received.
They have also agreed to pay to advertise the compensation scheme in national newspapers.
"We have been encouraged that, despite their different business needs, a large number of firms have voluntarily come together to create a redress scheme that will provide a fair outcome for customers," said the FCA's chief executive, Martin Wheatley.
The up-to-£1.3bn cost of the scheme is still only a fraction of the estimated £15bn total compensation bill faced by the banking industry for the Payment Protection Insurance mis-selling scandal.
The banks may have to pay further billions to compensate small businesses who were mis-sold complex financial derivatives called interest-rate swaps.
The CPP compensation scheme must first be voted on by customers and approved by the High Court, and the FCA said it did not expect the first compensation payments to be made until next spring.
Unnecessary and exaggeratedDuring the period of mis-selling between January 2005 and March 2011, CPP sold 4.4 million policies and generated £354m in gross profit. A further 18.7 million policies were renewed during the same period, generating an income of £656m.
Many customers were put in contact with CPP when they rang a number on their new bank card in order to activate it. Many thought they were talking to their bank, but they were in fact being put in touch with a salesperson from CPP.
CPP then used the opportunity of the call to offer card protection insurance. If the customer bought the product, the bank got a commission.
The amount of compensation that an individual customer can expect will depend on what products they bought and for how many years, but could run into hundreds of pounds.
Victims will receive 8% interest on the amounts being reimbursed.
The York-based CPP Group sold a card protection product costing about £30 a year, that was designed to cover losses if a card was lost or stolen.
It said customers would benefit from up to £100,000 of insurance cover, but customers were already covered by their banks. Generally, cardholders are not liable for unauthorised card payments on lost or stolen credit and debit cards.
A second product, sold for about £80 a year, was designed to cover costs if the customer's identity was stolen.
The FCA's predecessor, the Financial Services Authority, found that CPP overstated the risks and consequences of ID theft when this insurance was being sold.
Financial lifelineCPP's own bill for the mis-selling has reached £54m, according to the company's latest financial results released earlier on Thursday.
It covers, among other things, a £10.5m fine imposed on it last year, as well as an expected £14.5m in compensation payments for the 300,000 policies it sold directly, without the help of other banks or credit card companies.
The bill and the loss of business since the scandal first came to light in 2010 have brought CPP to the edge of bankruptcy.
The company's latest financial results contain a long note from its directors justifying why they think CPP can continue as a going concern, despite admitting that the firm notched up a £3.5m underlying operating loss in the last six months.
Last month, CPP secured a critical £36m three-year refinancing deal from its lenders that staved off the immediate risk of bankruptcy. The FCA said this deal was also critical to agreeing the compensation fund.
CPP's share price collapsed as a result of the scandal, from about £3 in early 2011 to 3p a month ago, but has recovered to about 20p since the company received its financial lifeline.
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