The Financial Conduct Authority (FCA) said it was the highest penalty ever imposed against a UK retail banking operation and came after it uncovered “serious failings” in bonus schemes within Lloyds TSB, Halifax and Bank of Scotland (BoS), which saw frontline staff pick up windfalls even when products were mis-sold to customers.
The investigation focused on sales of investment products, such as stocks and shares, individual savings accounts (Isas), and insurance protection products, including critical illness and income protection cover, between January 2010 and March 2012. More than a million of these products were sold to over 690,000 customers during this period.
Lloyds has begun contacting customers, but said it was too early to give details on the number of those who may be due compensation.
It is thought a small percentage of the 690,000 customers will be due redress.
The FCA said the Lloyds bonus schemes had worrying “higher risk” features, which offered the potential of an automatic promotion and pay rise.
But those who failed to meet sales targets could face demotion and a pay cut of as much as 50 per cent. In 2011, about 14 per cent of advisers within Lloyds TSB were demoted, while 10 per cent were promoted.
The FCA said in the worst case it had seen, one adviser sold insurance products to himself, his wife and a colleague to avoid being demoted.
Lloyds TSB also offered a so-called “champagne bonus”, which could see an adviser land a windfall worth 35 per cent of their monthly salary, while Halifax and BoS paid one-off prizes such as a “grand in your hand” for meeting certain targets.
Management oversight of the schemes was so lax that seven out of ten advisers at Lloyds TSB and three out of ten at Halifax were rewarded with monthly bonuses even though many sales were found to have been mis-sold or potentially mis-sold, according to the FCA. More than 200 sales advisers at Lloyds TSB received a bonus, even when all of their sales were unsuitable or potentially unsuitable.
The fine comes as taxpayer-backed Lloyds has already paid out more than £8 billion to compensate customers who were mis-sold payment protection insurance (PPI).
The FCA said its penalty was increased by 10 per cent because Lloyds ignored repeated warnings from industry regulators over its incentive schemes, and the bank had been fined for unsuitable bond sales ten years ago, in part due to sales targets.
Tracey McDermott, the FCA’s director of enforcement and financial crime, said: “The findings do not make pleasant reading.”
She added: “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.”
Lloyds apologised to customers and admitted its management of incentive schemes was “inadequate”.
Chief executive Antonio Horta-Osorio last month picked up a bonus worth more than £2m for the bank’s performance in 2012.
The group said it had made major changes to its sales incentive schemes since the issues first emerged in 2011, “to ensure that all its schemes are focused on doing the right things for customers”.
The FCA said Lloyds agreed to settle early, reducing its penalty from £35m.
It follows a review by the FCA’s predecessor, the Financial Services Authority, of sales bonus schemes in the banking industry. While 20 firms had features that increased the risk of mis-selling, Lloyds’ failings were ‘’so serious’’ that it was referred for further investigation last year.
The FCA will follow up with firms across the banking sector to see if improvements have been made to incentive schemes and their governance in the wake of the 2012 review results.
It will report back in the first quarter of next year.
Martin Lewis, founder of MoneySavingExpert.com, said the recent raft of bank scandals had 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.”