National Australia Bank will pay almost $50 million to tens of thousands of customers sold "worthless" credit card and personal loan insurance.
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The bank has agreed to settle a class action brought on behalf of unemployed, student and pensioner customers who were sold insurance they would not have been eligible to claim against.
It is the largest class settlement one of the big four banks has paid to customers, law firm Slater and Gordon said.
"The types of people we've spoken to are people who trusted their bank and who often took their bank's advice without any question," lawyer Andrew Paull told reporters on Wednesday.
But the $49.5 million in compensation won't reach customers in time for Christmas because the Federal Court still needs to approve the settlement at a hearing on January 30.
About 400,000 customers were sold the credit card and personal loan insurance products but only those who weren't eligible to claim against them would be compensated, Mr Paull said.
He gave the example of single fathers living in dire circumstances who took out a loan to meet the bare necessities, only to be told they should get the "worthless" insurance as well.
"Those people ought never, in our view, have been sold those products because they were very unlikely to benefit from them," Mr Paull said.
Individual customers are expected to get hundreds and in some cases thousands of dollars back.
NAB no longer sells the consumer credit insurance products.
"The settlement is the right thing to do for our customers and shareholders," NAB chief legal and commercial counsel Sharon Cook said in a statement.
"As we have said, we can only move forward if we deal with the past, so that we can earn trust among customers and the broader community and grow confidence in the future of NAB."
An Australian Securities and Investments Commission report released in July found consumer credit insurance, which is often added on when a person takes out a loan or gets a credit card, represented "extremely poor value for money" and was regularly mis-sold.
The add-on insurance covers consumers if they are unable to meet minimum loan repayments due to unemployment, sickness or injury.
Slater and Gordon said the class action settlement, which was the first arising out of the banking royal commission, was made without any admission of liability.
Australian Associated Press
