UK banks face hefty credit card claims after pact with watchdog

By Kirstin Ridley LONDON (Reuters) - Around two million Britons who may have been mis-sold insurance to cover events such as credit card fraud will be asked to vote for a scheme that could cost top banks hundreds of millions of pounds in compensation. The scheme, which affects security products on credit and debit cards over an eight-year period, comes after banks have already set aside more than 24 billion pounds to compensate customers mis-sold loan and mortgage insurance. The Financial Conduct Authority (FCA) said on Tuesday 11 lenders and card issuers had voluntarily agreed to compensate customers after "collaborative discussions". They include Barclays , HSBC , Lloyds , RBS and Affinion, a company which aims to improve customer loyalty. The total amount of compensation will depend on how many eligible customers pursue a claim after buying or renewing products such as Sentinel, Safe and Secure Plus and Card Protection between Jan. 14, 2005 and August 2013. The average annual cost of such products, whose features included insurance to cover fraudulent use if a card was lost or stolen, was 25 pounds ($38). This could put the final compensation bill at around 400 million pounds. Cover for fraudulent use is unnecessary because card issuers are typically responsible for transactions after cards are reported lost or stolen. Before such a report, customers are only liable for unauthorised purchases in limited circumstances, the FCA noted. Eligible customers will be contacted by May and asked to vote in favour of the scheme. If enough customers vote for it, compensation could be paid later this year. The scheme is similar to a deal in which around 2.4 million customers claimed 450 million pounds after being sold unnecessary card or identity protection through a company called CPP last year, without the FCA resorting to enforcement action. However, some consumer groups say such schemes risk failure because the redress door is slammed shut too early. "These policies were effectively fear-sold to fill a gap in the market that didn’t exist and people who got this mostly useless insurance should get their money back," said Martin Lewis, personal finance specialist and editor of consumer advice website MoneySavingExpert.com. But he urged the regulator to ensure customers did not mistake letters for such schemes as spam and discard them by mistake. "Only 33 percent who were due money (over CPP) ... claimed it," he said. Tracey McDermott, the FCA's new supervision head, said the industry's willingness to voluntarily try and resolve historic problems was a step towards helping restore trust in financial services. (Editing by Jon Boyle and Mark Potter)