Westpac is offering refunds to more than 10,600 customers found to be paying for insurance they did not need.
The refunds come after the Australian Securities and Investments Commission detected Westpac had collected premiums from some customers who did not have a loan or had already paid it off.
Westpac says the two credit insurance policies in question, which have been offered since 2002 and 2007, were designed to provide benefits in the event of death or illness as long as premiums were being paid, rather than for the life of a loan.
"ASIC felt that some customers may not be completely aware of this fact and we have been working with them since 2012 to come to this point," a spokesperson said.
Westpac will offer to refund any premiums that were paid before a loan had been drawn upon, after it had been paid off, or when a customer did not intend to be covered.
The amount to be refunded will not be known until the affected customers respond to the bank's offer.
It is the latest instance of a refund from a major financial institution after the involvement of the corporate regulator.
Commonwealth Bank is currently finalising $7.6 million in payments to 8,400 regional customers who did not receive the lower fees and interest rates to which they were entitled.
In July, National Australia Bank paid out $25 million to 62,000 wealth management customers short-changed by problems with the bank's allocation of income and tax.
A month earlier, Macquarie Investment Management refunded $5.5 million to 2,300 customers overcharged in fees due to a computer glitch, and in April ANZ paid $30 million to 8,500 customers who did not receive the full benefits of a priority financial advice service.
