People will be entitled to a payout after the lender told them their no claims bonus protection would be around £1.2 million cheaper collectively than it actually was.
In writing to 124,451 customers between April 2020 and September last year, Tesco Bank misled them into thinking their policies would be £10 cheaper than reality.
The Competition and Markets Authority (CMA) said that the bank will now explain the situation to customers, who can choose to keep the policy or get a refund.
‘This error meant that motorists were unable to make a fully informed decision as to whether they wanted no claims bonus protection,’ the CMA said.
‘Had they been told the right price, they may have decided to cancel their no claims bonus protection or switch to another, cheaper provider.
‘Thanks to our action, Tesco customers will now have the chance to decide whether they want to keep their current protection or get their money back.’
It said that Tesco Bank had failed to ‘clearly, prominently and accurately’ displace the additional cost of a no claims bonus protection.
This meant that customers did not understand the value in removing the protection from their deal.
Tesco Bank reported the problems to the CMA itself.
The bank said: ‘We apologise for this error, which we have now fixed.
‘All existing customers who were impacted have been contacted with the option of a refund and the removal of their no claims bonus protection.
‘However, the overwhelming majority of customers are choosing to retain their protection. In all cases there was no impact on the cover provided to our customers.’
Around 0.5 per cent of customers who have been contacted have chosen to get a refund.
Seven years ago the CMA concluded an investigation into private motor insurance.
At the time it found that the price of no claims bonus protections was often unclear to customers.
As a result it created a legal order which forced providers to clearly state the cost of the protection.
The CMA added: ‘Given the action being taken by Tesco Bank, the CMA does not consider it appropriate to take formal enforcement action in relation to this breach at present.
‘The CMA will monitor the resolution of this breach and Tesco Bank’s future compliance closely.’