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 and13 high street banks and credit card issuers will pay up to 1.3billion pounds ($2 billion) to millions of customers who weremis-sold CPP credit card insurance policies.

The announcement by the Financial Conduct Authority (FCA) onThursday heaps further embarrassment on British banks after astring of mis-selling scandals and huge compensation paymentspartly responsible for them having to increase their cashbuffers.

Banks are still paying out for mis-selling paymentprotection insurance (PPI), with more than 10 billion poundspaid so far.

In the latest scandal, CPP is unable to cover thecompensation unaided and all parties have agreed to a voluntary"scheme of arrangement" - the first of its kind by the FCA - tomake processing claims simpler and do away with the need forclaims management companies that abounded in PPI cases.

"Seven million customers, who between them bought andrenewed about 23 million policies, will soon receive a letterfrom CPP giving more information on the process," the FCA said.

"The involvement of the banks and credit card issuersreflects the fact that they introduced customers to CPP'sproducts and so must share responsibility for putting thingsright."

Having earlier reported that it had swung to a 2.6 millionpound first-half loss from a 4.4 million pound profit last year,CPP said its priority was to achieve the best outcome forcustomers.

By 1010 GMT the company's shares had tumbled by more than 25percent to 15 pence.

Barclays, one of the banks involved in the latestmis-selling, said that without lenders' agreement to paycompensation CPP would not be able to meet its financialobligations, "which would not be in the interest of ourcustomers".

CRACKDOWN

In July CPP agreed a 36 million pound refinancingarrangement to help it to pay compensation, though this is afraction of the likely bill.

Jeffries International analyst Joseph Dickerson said heexpected "similar blanket agreements" for compensation in thefuture but that he does not expect this deal to have a materialimpact on banks' earnings or capital.

The FCA has a remit to protect consumers as Britain tries todraw a line under years of mis-selling financial products,dating back to the sale of pensions and endowment mortgages inthe 1980s.

Its broad crackdown includes a diverse range of productsfrom mobile phones to holidays and interest rate swaps, whichare meant to protect businesses against unexpected rate rises.

The Financial Services Authority, which was replaced by theFCA in April, fined CPP 10.5 million pounds in November formis-selling. Card protection insurance costs about 30 pounds ayear, with identity protection costing about 80 pounds.

The FCA said that customers were given misleading andunclear information about the policies and ended up buying cardprotection they did not need because they were already coveredby their banks, while the risk of identity theft was overstated.

Customers will be contacted and must vote in favour of thescheme for it to go ahead. CPP, banks and credit card issuerswill pay for advertisements to raise awareness among customers.

The banks and credit card issuers are Bank of Scotland, Barclays, Canada Square Operations, CapitalOne, 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 spring2014 and will cover sales going back to January 2005.

Lloyds said it does not expect the compensation payments tohave a material impact on the group.($1 = 0.6374 British pounds) (Additional reporting by Laura Noonan; Editing by Tom Pfeifferand David Goodman)