U.K. Banks to Pay $2 Billion for Mis-Sold Card-Insurance

Britain’s biggest banks will pay as much as 1.3 billion pounds ($2 billion) to compensate customers wrongly sold insurance to cover credit-card and identity theft.

A group of 13 banks and credit-card issuers, including Barclays Plc, Lloyds Banking Group Plc, HSBC Holdings Plc, Royal Bank of Scotland Group Plc, Capital One (Europe) Plc and MBNA Ltd. will fund the redress program, the Financial Conduct Authority said in a statement today. The regulator didn’t disclose the firms’ individual contributions.

Regulators said in November that CPP Group Plc, which provided the insurance for the lenders, overstated the risks and consequences of identity theft and failed to tell buyers of its card-protection product that they were already covered for losses of as much as 100,000 pounds by their banks. The compensation adds to the 15.5 billion pounds Britain’s banks have already set aside for customers who were wrongly sold payment-protection insurance that they didn’t need.

“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,” the FCA said in the statement.

About seven million customers who bought the insurance since 2005 will be able to claim a refund on the premiums they paid plus 8 percent interest, the London-based FCA said. The money is expected to be paid in early 2014.

Barclays Costs?

Banks sold the insurance under names such as HSBC Card Guard, Barclays Cardholder Protection and NatWest Card Protection. Typically, CPP’s card protection cost about 30 pounds a year and identity protection 80 pounds, the FCA said.

Barclays may have to pay 286 million pounds, more than any other U.K. bank, because it has the largest share of the credit card market, Mark Phin, an analyst at Keefe Bruyette & Woods Ltd., said in a note to clients today. Barclays, HSBC, RBS and Lloyds may have to pay a combined 650 million pounds, he said. Lloyds’s costs may be as little as 52 million pounds, he added.

“This is clearly unhelpful,” London-based Phin said. “But it’s small in isolation and we fully expect that some provisions will have been taken by the banks already.”

CPP’s customers will have to vote to approve the program and seek court approval before payments can start, the FCA said. The York, England-based company agreed to repay customers about 14.5 million pounds and pay a fine of 10.5 million pounds last year. CPP said today it will only be responsible for funding compensation for customers to whom it sold insurance directly.

Shares Fall

The insurer’s shares fell 27 percent in London, giving it a market value of about 25 million pounds. The six-member FTSE 350 Banks Index advanced 1.3 percent.

“We are determined to put things right for Barclays customers who are eligible for redress payments as swiftly as possible,” Paul Maddox, Barclays’s managing director for customer service, said in a statement.

RBS and Lloyds said in separate statements they will work with CPP to achieve “the best outcome” for customers affected. Officials at HSBC declined to comment.

HSBC disclosed a $45 million provision for the first half which includes money set aside to compensate card-protection customers. Prior disclosures from HSBC don’t break out further provisions. Barclays, RBS and Lloyds do not make comparable disclosures.

Following is a list of banks that have agreed to provide the compensation based on the FCA statement:

Bank of Scotland Plc (part of Lloyds Banking Group Plc)
Barclays Bank Plc
Canada Square Operations Limited (formerly Egg Banking Plc)
Capital One (Europe) Plc
Clydesdale Bank Plc (part of National Australia Group Europe)
Home Retail Group Insurance Services Ltd.
HSBC Bank Plc
MBNA Limited
Morgan Stanley Bank International Ltd.
Nationwide Building Society
Santander U.K. Plc
Royal Bank of Scotland Plc
Tesco Personal Finance Plc
Before it's here, it's on the Bloomberg Terminal.