Citigroup Inc., the world’s biggest credit-card lender, is facing rising costs from the misselling of so-called add-on card products in the U.K. and U.S.

Citigroup boosted reserves by $266 million last year to compensate U.K. customers wrongly sold payment protection insurance, or PPI, according to a regulatory filing today by the New York-based lender. The bank may also face penalties from U.S. regulators amid an industrywide probe into the sale of payment protection and identity monitoring products, according to the filing.

Lenders including Discover Financial Services and Lloyds Banking Group Plc are dealing with the costs from the improper selling of products such as PPI, which is used to cover payments on credits cards if customers get sick or lose their jobs. Britain’s biggest banks have reserved more than 13 billion pounds ($19.5 billion) for PPI compensation, while U.S. firms including JPMorgan Chase & Co. and Charlotte, North Carolina- based Bank of America Corp. are retreating from the market for add-on card products amid scrutiny from regulators.

“While the number of customer complaints regarding the sale of PPI significantly increased in 2012, and the number could continue to increase, the potential losses and impact on Citi remain volatile and are subject to significant uncertainty,” Citigroup said in the filing.

The boost brought the amount set aside for PPI claims in the U.K. to $376 million at Dec. 31, Citigroup said. Rising U.K. customer complaints triggered by “continued regulatory focus” prompted the increase, according to the filing.

The complaints stem primarily from two Citigroup consumer- finance entities, CitiFinancial Europe Plc and Canada Square Operations Ltd., formerly known as Egg Banking Plc, the lender said. While Citigroup has sold or is winding down these businesses, it retains potential liability for the PPI sales, the bank said.

Customers who bought PPI rarely compared prices and terms or switched providers, and usually weren’t aware they could purchase the insurance from other companies, the U.K.’s Competition Commission has said.

Lloyds, Britain’s biggest mortgage lender, set aside 1.5 billion pounds in the fourth quarter of 2012 to compensate customers wrongly sold PPI, taking its total charge to about 6.8 billion pounds. Royal Bank of Scotland Group Plc yesterday made an additional PPI provision of 450 million pounds.

In the U.S., a Consumer Financial Protection Bureau probe into deceptive marketing practices has already led to fines for Discover Financial and Capital One Financial Corp. New York- based JPMorgan, Bank of America and Citigroup said last year that they’ve halted certain add-on practices.

“In light of the current regulatory focus on add-on products and the actions regulators have taken in relation to other credit card issuers, one or more regulators may order that Citi pay restitution to customers,” Citigroup said in the filing.

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