Britain's banks face a bill of ??1.3 billion to compensate millions of customers who were mis-sold credit card and identity protection insurance, regulators said Thursday, in the latest blow to the scandal-hit sector.

The Financial Conduct Authority (FCA) said in a statement that it had agreed a compensation package with policy provider Card Protection Plan Limited (CPP), as well as 13 banks and credit card issuers.

Among these was Barclays, HSBC and Royal Bank of Scotland, as well as Lloyds subsidiary Bank of Scotland.

Card holders were mis-led into spending about ??30-??80 a year on insurance, the watchdog said, spotlighting another case of sharp practice in the British financial sector which has been damaged by a number of scandals in recent years.

The cost of the compensation works out at up to the equivalent of $2.0 billion or 1.5 billion euros.

The companies also comprise Canada Square Operations (formerly Egg Banking), Capital One, Clydesdale Bank, Home Retail Group Insurance Services, MBNA, Morgan Stanley, Nationwide Building Society, Santander and Tesco Personal Finance.

"The FCA has reached an agreement with CPP and 13 high street banks and credit card issuers that will pave the way for redress to be paid to customers who were mis-sold CPP's Card Protection and Identity Protection policies," the regulator said in a statement.

"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 redress bill could be up to ??1.3 billion," it added.

The mis-selling scandal ran between 2005 and 2011, during which time CPP sold 4.4 million policies and renewed almost 19 million.

Of the 4.4 million policies, it is believed only around 300,000 were sold directly by CPP, while lenders were responsible for around 4.1 million.

Many bank customers seeking to activate new cashcards and credit cards were referred to a CPP call centre, which would then seek to sell the insurance policies.

"Customers were given misleading and unclear information about the policies so that they bought cover that either was not needed, or to cover risks that had been greatly exaggerated," the FCA added on Thursday.

"As well as CPP selling directly to customers, high street banks and credit card issuers introduced millions of customers to CPP."

The watchdog added: "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 amount of compensation will depend on the type of policy and the length of time it was held, while CPP will contact affected customers from the end of August.

CPP had already been slapped with a ??10.5-million fine in November 2012 over the issue.

The insurance policies were called 'Card Protection', which cost approximately ??30 per year, and 'Identity Protection', which cost about ??80 per year.

"We have been encouraged that, working closely with the FCA and despite their different business needs, a large number of firms have voluntarily come together to create a redress scheme that will provide a fair outcome for customers," added FCA chief executive Martin Wheatley.

"This kind of collaborative and responsible approach is a good example of how firms are taking more responsibility and helping -- step by step -- to rebuild trust."

Britain's troubled banks are still reeling from a series of scandals, including the Libor rate-rigging crisis and the mis-selling of payment protection insurance (PPI) on credit products.

The sector has already paid out more than ??11 billion to compensate customers who were mis-sold PPI.

The FCA added on Thursday that the compensation scheme required approval from Britain's High Court.

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