Britain's markets watchdog said it had reached a deal with insurer CPP and 13 banks and credit card issuers to pay customers compensation of up to £1.3 billion sterling for mis-sold credit card insurance.
It is the latest mis-selling scandal to hit Britain's banks, which have been forced to increase their capital buffers partly because of huge compensation payments.
"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 Financial Conduct Authority said.
"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,'' it added.
UK banks are still paying out compensation for mis-selling payment protection insurance (PPI), which so far has totalled well over £10 billion.
The Financial Services Authority, which was replaced by the FCA in April, fined CPP £10.5m in November for mis-selling.
Card protection insurance costs about £30 a year, with identity protection about £80 annually.
The FCA said customers were given misleading and unclear information about the policies and ended up buying protection they did not need.
The banks, credit card issuers and CPP have agreed to a "scheme of arrangement" which seeks to make processing claims simpler and easier, subject to High Court approval.
The banks and credit card issuers are Bank of Scotland , Barclays, Canada Square Operations, Capital One, Clydesdale Bank, Home Retail Group Insurance Services, HSBC , MBNA, Morgan Stanley, Nationwide, Santander, RBS and Tesco Personal Finance.
The FCA said the first payments were not due until next spring.
