Customers were given "misleading" and unclear information about insurance policies by banks and credit card firms, the Financial Conduct Authority said.
"Customers bought cover that either was not needed, or to cover risks that had been greatly exaggerated," said the FCA.
The £1.3bn compensation payment for mis-selling of Card Protection Plan (CPP) policies affects two insurance products:
- ‘Card Protection’, which cost approximately £30 per year
- ‘Identity Protection’, which cost approximately £80 per year