UK credit card issuers are on the hook for £1.3 billion for selling the 23 million insurance policies sold by Card Protection Plan (CPP) to seven million customers, reports Mark Thompson for CNN Money.

UK banks

UK banks refer customers to CPP

UK banks and other credit card issuers referred their customers to CPP for protection against identity theft and other forms of fraud, but the Financial Conduct Authority has ruled that the policies were sold using misleading and inaccurate information and that anyone who bought policies from 2005 on is entitled to compensation. Customers will be able to claim the amount of money they paid for the policies plus 8 percent interest.

“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 Financial Conduct Authority wrote.

CPP has already been fined £10.5 million in 2012 and the UK financial sector has paid more than$20 billion to compensate homeowners who were sold payment protection insurance at prices that were deemed to be heavily inflated along with their mortgages.

UK institutions responsible for setting up the funds

Thirteen institutions are responsible for setting up the fund including Barclays PLC (NYSE:BCS) (LON:BARC), HSBC Holdings plc (LON:HSBA) (NYSE:HBC), Morgan Stanley (NYSE:MS), MBNA, Lloyds Banking Group PLC (ADR) (NYSE:LYG) (LON:LLOY), Canada Square Operations Limited (formerly named Egg Banking), Tesco PLC (ADR) (OTCMKTS:TSCDY) (LON:TSCO), Nationwide Building Society (LON:CEBB), Banco Santander, S.A. (ADR) (NYSE:SAN) (MCE:SAN), National Australia Bank Ltd. (ASX:NAB) (OTCMKTS:NABZY), Home Retail Group Plc (LON:HOME), and Capital One Financial Corp. (NYSE:COF).

JPMorgan’s London Whale case

This decision comes at a time when the UK financial sector is already trying to repair its damaged reputation, most recently with JPMorgan Chase & Co. (NYSE:JPM)’s London Whale controversy, that has forced the Financial Conduct Authority and the Serious Fraud Office to work with the SEC to investigate the actions of two London traders who tried to cover up the losses from Bruno Iksil, called the London Whale because of his massive losses. HSBC had to pay $1.92 billion to settle money laundering charges with US regulators, and at least ten companies are suspected of having been involved in manipulating the LIBOR index (London Inter-bank Offered Rate) which is the basis of many other transactions and interest rate determinations worldwide. With so many scandals on the heels of the global economic crisis it’s no wonder people are having trouble trusting banks.