UPDATE 2- UK banks agree to pay for latest mis-selling scandal
* Analyst sees no big impact on earnings, capital
* First payments not expected until spring 2014
* Part of wider crackdown on insurance sales tactics
* CPP shares down more than 20 pct (Adds reaction, details, CPP share price)
By Huw Jones
LONDON, Aug 22 (Reuters) - British insurer CPP and 13 high street banks and credit card issuers will pay up to 1.3 billion pounds ($2 billion) to millions of customers who were mis-sold CPP credit card insurance policies.
The announcement by the Financial Conduct Authority (FCA) on Thursday heaps further embarrassment on British banks after a string of mis-selling scandals and huge compensation payments partly responsible for them having to increase their cash buffers.
Banks are still paying out for mis-selling payment protection insurance (PPI), with more than 10 billion pounds paid so far.
In the latest scandal, CPP is unable to cover the compensation unaided and all parties have agreed to a voluntary "scheme of arrangement" - the first of its kind by the FCA - to make processing claims simpler and do away with the need for claims management companies that abounded in PPI cases.
"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 FCA 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."
Having earlier reported that it had swung to a 2.6 million pound first-half loss from a 4.4 million pound profit last year, CPP said its priority was to achieve the best outcome for customers.
By 1010 GMT the company's shares had tumbled by more than 25 percent to 15 pence.
Barclays, one of the banks involved in the latest mis-selling, said that without lenders' agreement to pay compensation CPP would not be able to meet its financial obligations, "which would not be in the interest of our customers".
In July CPP agreed a 36 million pound refinancing arrangement to help it to pay compensation, though this is a fraction of the likely bill.
Jeffries International analyst Joseph Dickerson said he expected "similar blanket agreements" for compensation in the future but that he does not expect this deal to have a material impact on banks' earnings or capital.
The FCA has a remit to protect consumers as Britain tries to draw a line under years of mis-selling financial products, dating back to the sale of pensions and endowment mortgages in the 1980s.
Its broad crackdown includes a diverse range of products from mobile phones to holidays and interest rate swaps, which are meant to protect businesses against unexpected rate rises.
The Financial Services Authority, which was replaced by the FCA in April, fined CPP 10.5 million pounds in November for mis-selling. Card protection insurance costs about 30 pounds a year, with identity protection costing about 80 pounds.
The FCA said that customers were given misleading and unclear information about the policies and ended up buying card protection they did not need because they were already covered by their banks, while the risk of identity theft was overstated.
Customers will be contacted and must vote in favour of the scheme for it to go ahead. CPP, banks and credit card issuers will pay for advertisements to raise awareness among customers.
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 are not due until spring 2014 and will cover sales going back to January 2005.
Lloyds said it does not expect the compensation payments to have a material impact on the group. ($1 = 0.6374 British pounds) (Additional reporting by Laura Noonan; Editing by Tom Pfeiffer and David Goodman)