UPDATE 1-UK banks face hefty credit card claims after pact with watchdog

* Some card insurance features unnecessary - regulator

* Two million customers could be affected

* Compensation could reach hundreds of millions of pounds (Adds consumer group comment)

By Kirstin Ridley

LONDON, Jan 27 (Reuters) - Around two million Britons whomay have been mis-sold insurance to cover events such as creditcard fraud will be asked to vote for a scheme that could costtop banks hundreds of millions of pounds in compensation.

The scheme, which affects security products on credit anddebit cards over an eight-year period, comes after banks havealready set aside more than 24 billion pounds ($36 billion) tocompensate customers mis-sold loan and mortgage insurance.

The Financial Conduct Authority (FCA) said on Tuesday 11lenders and card issuers had voluntarily agreed to compensatecustomers after "collaborative discussions". They includeBarclays, HSBC, Lloyds, RBS and Affinion, a company which aims to improve customer loyalty.

The total amount of compensation will depend on how manyeligible customers pursue a claim after buying or renewingproducts such as Sentinel, Safe and Secure Plus and CardProtection between Jan. 14, 2005 and August 2013.

The average annual cost of such products, whose featuresincluded insurance to cover fraudulent use if a card was lost orstolen, was 25 pounds ($38). This could put the finalcompensation bill at around 400 million pounds.

Cover for fraudulent use is unnecessary because card issuersare typically responsible for transactions after cards arereported lost or stolen. Before such a report, customers areonly liable for unauthorised purchases in limited circumstances,the FCA noted.

Eligible customers will be contacted by May and asked tovote in favour of the scheme. If enough customers vote for it,compensation could be paid later this year.

The scheme is similar to a deal in which around 2.4 millioncustomers claimed 450 million pounds after being soldunnecessary card or identity protection through a company calledCPP last year, without the FCA resorting to enforcement action.

However, some consumer groups say such schemes risk failurebecause the redress door is slammed shut too early.

"These policies were effectively fear-sold to fill a gap inthe market that didn't exist and people who got this mostlyuseless insurance should get their money back," said MartinLewis, personal finance specialist and editor of consumer advicewebsite MoneySavingExpert.com.

But he urged the regulator to ensure customers did notmistake letters for such schemes as spam and discard them bymistake. "Only 33 percent who were due money (over CPP) ...claimed it," he said.

Tracey McDermott, the FCA's new supervision head, said theindustry's willingness to voluntarily try and resolve historicproblems was a step towards helping restore trust in financialservices.

($1 = 0.6630 pounds) (Editing by Jon Boyle and Mark Potter)