Taxpayer-backed Lloyds Banking Group is fined a record £28m after the City regulator uncovered failings in its bonus schemes that put pressure on sales staff to hit targets or risk being demoted.
The Financial Conduct Authority (FCA) said a lack of control over incentive schemes for advisers within Lloyds TSB, Bank of Scotland and Halifax meant there was a risk that customers were sold unsuitable financial products.
In the worst case, the FCA found that an adviser had sold an insurance policy to himself, his wife and a colleague, to ensure he was not demoted.
It is the largest penalty ever imposed by the FCA or its predecessor, the Financial Services Authority, for retail conduct failings and was increased by 10 per cent because Lloyds repeatedly ignored warnings from regulators over its staff incentive schemes.
Conservative MP Mark Garnier, a member of the Treasury select committee, told Channel 4 News the big banks had created an “accountability firewall” that protected the most senior staff from what other employees were doing.
He said “heads should roll” at Lloyds and that lessons had “apparently not” been learned since the 2008 financial crisis.
Tracey McDermott, the FCA’s director of enforcement and financial crime, said:
“The findings do not make pleasant reading.
“Customers have a right to expect better from our leading financial institutions and we expect firms to put customers first, but firms will never be able to do this if they incentivise their staff to do the opposite.”
The FCA found that seven out of ten advisers at Lloyds TSB and three out of ten at Halifax received their monthly bonuses even though a high proportion of sales were found, by the firms themselves, to be unsuitable or potentially unsuitable.
At Lloyds TSB, 229 advisers received a bonus even though all of their assessed sales were deemed unsuitable or potentially unsuitable.
The fine follows a review of bonus schemes in the banking industry, which found that 20 financial firms were at risk of mis-selling products to their customers.
Lloyds’ failings were “so serious” that it was referred for further investigation in 2012. The bank has agreed to pay compensation to customers affected by mis-selling. It is carrying out a review into what happened and it is not clear at the moment what the total compensation bill will be.
Customers who believe they may have been mis-sold financial products do not need to take any action; those affected will be contacted by Lloyds.
Products mis-sold include share ISAs and critical illness and income protection policies. The period of mis-selling was between 1 January 2010 and 31 March 2012.
More than a million products were sold to about 700,000 people who invested roughly £2bn.
A short history of bank mis-selling
Interest rate swaps
In June 2012, Barclays, HSBC, Lloyds and Royal Bank of Scotland (RBS) agreed to compensate thousands of business customers after the Financial Services Authority found they mis-sold specialist insurance on loans. Businesses were sold interest rate swap arrangements (IRSAs), which were meant to protect them against the effects of a rise in interest rates. Channel 4 News revealed in December 2012 that in some cases, hidden penalties began to kick in when rates fell.
In October 2013, we also reported that RBS had been seizing properties from customers only for a subsidiary of the bank to buy them at knock-down prices. Property developer Chris Kashourides blamed his predicament on the purchase on an IRSA.
Payment protection insurance
In November 2012, the Lloyds bill for mis-sold PPI passed the £5bn mark. In February of that year, five serving and former Lloyds bankers were stripped of £1.4m in bonuses because of their role in this mis-selling. In February 2013, Barclays said it was allocating another £1bn to compensate people wrongly sold financial products.
More than half - £600m - will go to those mis-sold PPI and is on top of the £2bn Barclays had already put aside. The rest of the money - £400m - is to cover mis-sold interest rate swaps to small businesses, and was in addition to the £450m previously allocated.
Lloyds apologised to customers and admitted its management of incentive schemes was “inadequate”.
It has begun contacting customers affected and said it has made major changes to its sales incentive schemes since the issue first emerged in 2011 “to ensure that all its schemes are focused on doing the right things for customers and providing good service”.
Martin Lewis, founder of MoneySavingExpert.com, said the recent raft of bank scandals has seen customers become more sceptical of the industry’s sales practices.
He added: “We need a form of collective national hypnosis to ensure that when people walk into their bank and see ‘adviser’, they read ‘salesperson’ instead.
“A bank’s job is to flog you stuff, and they’ve proved time and time again that whether customers need it or not, they’ll do just that.”