Two million customers of the major high street banks are to receive compensation of as much as £200 after being mis-sold worthless credit card protection policies.

The policies, typically costing £25 a year, promised to reimburse customers for fraudulent transactions if their cards were lost or stolen, and earned banks substantial commission. But they were largely pointless as the banks were already obliged to cover customers for losses.

The policies, produced by a company called Affinnion, were sold by banks and credit card providers between January 2005 and August 2013 under the names Card Protection, Sentinel, Sentinel Gold, Sentinel Protection, Sentinel Excel and Safe and Secure Plus.

The compensation deal is separate to the £450m package agreed for customers of CPP in 2014, a similar card protection product sold by the banks to 2.3 million people.

The Financial Conduct Authority (FCA) said: “Our view is that customers did not need this cover, as their bank or card issuer is typically responsible for any transactions after they tell it their card has been lost or stolen.”

Customers will receive their money back, plus interest at 8% a year. But compensation is dependent on customers approving the “AI Scheme” at a vote in spring, with payouts expected towards the end of 2015.

The FCA said: “While an agreement has been reached with the FCA on the nature of the proposed compensation scheme, it must be voted on by eligible customers (who are the scheme’s creditors) and formally approved by the high court before compensation can be paid. A majority of customers who vote will need to do so in favour of the scheme for this to happen. This means compensation is expected to be paid later this year.”

Eligible customers will be contacted by AI Scheme Limited from late January 2015 onwards. A letter in April or May 2015 will include an invitation for those eligible customers to vote for or against the scheme and details on how to vote. The letters will explain in more detail how the scheme works and what people can do next.

Tracey McDermott, director of supervision and authorisations at the FCA, said: “If approved, this scheme will provide those who may have concerns about the way their card security product was sold to them with a simple and free way to claim compensation.

“We have been encouraged that, working closely with the FCA, a large number of firms have voluntarily come together to create a redress scheme that will provide a fair outcome for customers. Such a willingness to take steps to resolve historic problems is an important step to restoring trust in the financial services.

“I would encourage anyone who receives a letter from AI Scheme Limited in April or May 2015 to vote for the scheme. The scheme will provide access to a dedicated helpline and a website, which customers should use if they have questions or need assistance.”

The FCA said it had not conducted a formal investigation into the selling of the insurance, and that Affinion and the high street banks and credit card issuers had voluntarily agreed to be part of the scheme and make compensation payments.

Banks and credit card issuers that will be making repayments are; AIB Group (UK) Plc trading as First Trust Bank in Northern Ireland and Allied Irish Bank (GB) in Great Britain; Barclays; Capital One; Clydesdale; HSBC; Lloyds Bank; Northern Bank trading as Danske Bank; Santander; Tesco Personal Finance; The Co-operative Bank and The Royal Bank of Scotland.

The scheme will not cover those who had a card security product as a benefit within a packaged bank account.