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London - Britain's troubled banking sector faces a bill of up to £1.3bn to compensate millions of customers mis-sold card insurance and identity protection policies, regulators said Thursday.
The Financial Conduct Authority (FCA) said in a statement that it had agreed a compensation package with company Card Protection Plan Limited (CPP) and 13 banks and credit card issuers, including Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group.
The announcement by the FCA heaps further embarrassment on British banks after a string of mis-selling scandals and huge compensation payments partly responsible for them having to increase their cash buffers.
Banks are still paying out for mis-selling payment protection insurance (PPI), with more than £10bn paid so far.
In the latest scandal, CPP is unable to cover the compensation unaided and all parties have agreed to a voluntary "scheme of arrangement" - the first of its kind by the FCA - to make processing claims simpler and do away with the need for claims management companies that abounded in PPI cases.
"Seven million customers, who between them bought and renewed about 23 million policies, will soon receive a letter from CPP giving more information on the process," the FCA said.
"The involvement of the banks and credit card issuers reflects the fact that they introduced customers to CPP's products and so must share responsibility for putting things right."
Having earlier reported that it had swung to a £2.6m first-half loss from a £4.4m profit last year, CPP said its priority was to achieve the best outcome for customers.
By 10:10 GMT the company's shares had tumbled by more than 25% to 15 pence.
Barclays, one of the banks involved in the latest mis-selling, said that without lenders' agreement to pay compensation CPP would not be able to meet its financial obligations, "which would not be in the interest of our customers".
Crackdown
In July CPP agreed a £36m refinancing arrangement to help it to pay compensation, though this is a fraction of the likely bill.
Jeffries International analyst Joseph Dickerson said he expected "similar blanket agreements" for compensation in the future but that he does not expect this deal to have a material impact on banks' earnings or capital.
The FCA has a remit to protect consumers as Britain tries to draw a line under years of mis-selling financial products, dating back to the sale of pensions and endowment mortgages in the 1980s.
Its broad crackdown includes a diverse range of products from mobile phones to holidays and interest rate swaps, which are meant to protect businesses against unexpected rate rises.
The Financial Services Authority, which was replaced by the FCA in April, fined CPP £10.5m in November for mis-selling. Card protection insurance costs about £30 a year, with identity protection costing about £80.
The FCA said that customers were given misleading and unclear information about the policies and ended up buying card protection they did not need because they were already covered by their banks, while the risk of identity theft was overstated.
Customers will be contacted and must vote in favour of the scheme for it to go ahead. CPP, banks and credit card issuers will pay for advertisements to raise awareness among customers.
The banks and credit card issuers are Bank of Scotland , Barclays, Canada Square Operations, Capital One, Clydesdale Bank, Home Retail Group Insurance Services, HSBC , MBNA, Morgan Stanley, Nationwide, Santander, RBS and Tesco Personal Finance.
The FCA said the first payments are not due until spring 2014 and will cover sales going back to January 2005.
Lloyds said it does not expect the compensation payments to have a material impact on the group.
