Around seven million people are set to share up to £1.3 billion in compensation after 13 high street banks and credit card companies agreed to offer redress for mis-sold credit card and identity theft protection.
The Financial Conduct Authority (FCA) said banks and credit card firms, together with card insurer CPP Group, have agreed to a compensation package which will see millions of customers contacted by CPP.
Major lenders including Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group have signed up to the compensation scheme, which is the latest blow to the banking industry after the multibillion-pound payment protection insurance (PPI) scandal.
The scandal involved 23 million policies and saw customers given misleading and unclear information about the insurance. CPP has already been fined a joint record £10.5 million by the City watchdog.
FCA boss Martin Wheatley said: "We believe this will be a good outcome for customers who may have been mis-sold the card and identity protection policies."
The FCA said compensation will depend on the type of policy held and how long they had it. If customers are due compensation, they will be entitled to the amount paid for their policy since January 14 2005, plus 8% interest on any sum owed.
Shares in CPP, which was recently handed a three-year £36 million funding lifeline by its banks, plunged more than 20% as investors balked at the cost of the redress scheme.
While CPP sold some policies directly to customers, banks and credit card companies also introduced millions of people to CPP. The FCA said banks and credit card firms "must share the responsibility for putting things right".
Card protection, which cost around £30 a year, and identity protection, which cost about £80 a year, were "widely mis-sold" by York-based CPP, the FCA said. The watchdog criticised CPP for promising customers up to £100,000 of insurance cover for their cards - something they did not need because they were already covered by their banks. It found CPP "greatly exaggerated" the risks and consequences of identity theft.
Unlike the PPI compensation deal which involves customers contacting lenders, CPP will get in touch with customers, starting from the end of the month. Banks, credit card firms and CPP will also advertise in newspapers to ensure people hear about the compensation. The FCA said customers will not need to use claims management companies to receive compensation.