Regulator agrees £1.3bn card protection mis-selling redress scheme with banks and card issuers

If the scheme is approved by the High Court and consumers, compensation will be funded by insurer Card Protection Plan Ltd (CPP) and 13 high street banks and credit card issuers that offered the products along with their own credit cards. According to the Financial Conduct Authority (FCA), seven million customers who bought and renewed around 23 million policies between them could be affected.

"We believe this will be a good outcome for customers who may have been mis-sold the card and identity protection policies," said Martin Wheatley, the FCA's chief executive. "Subject to CPP's customers approving the scheme, these policy holders will be able to claim a full refund of premiums with interest."

"Doing it this way means customers will get redress via a simple and standardised process, so we are encouraging customers to approve the scheme when they receive their voting letters in the autumn," he said.

According to the regulator, affected customers will begin to receive letters from CPP explaining how to claim compensation from 29 August. Banks and credit card issuers have also agreed to pay for a series of national newspaper advertisements to make sure as many people as possible hear about the scheme. Consumers will be able to claim using a simple 'scheme of arrangement' process. As claims are made, the firms that have signed up to the agreement will pay money into the scheme to cover the outgoing redress payments.

As the scheme requires customer and court approval, the FCA does not expect payments to be made until spring 2014. Customers who claim will be entitled to the amount that they have paid for their policy since 14 January 2005 - the date that the sale of general insurance products became a regulated activity - less any money paid out by the policy. They will also be entitled to 8% interest on the amount owed. Customer policies will be cancelled once a claim is made, even if the claim is rejected.

The scheme relates to two products offered by CPP both directly to consumers, and through banks and card providers. The company was fined £10.5 million in November 2012 by the FCA's predecessor, the Financial Services Authority (FSA), for giving "misleading and unclear information" about its Card Protection and Insurance Protection products to consumers. According to the regulator, CPP "overstated the risks and consequences of identity theft" when selling its £80/year Identity Protection product. When selling its Card Protection product, which cost £30/year, CPP told customers that they would benefit from "up to £100,000 worth of insurance cover" on fraudulent transactions if their cards were lost or stolen. However, the costs of these transactions are already covered by banks.

CPP no longer offers regulated insurance products to consumers as a result of the FSA's action, according to the regulator. It has recently completed a refinancing arrangement which was "critical" for the compensation scheme to be able to go ahead, it said.