Two banks could face hefty fines for poor handling of customer complaints after a Financial Services Authority (FSA) review uncovered weaknesses in five banks' handling processes.
The FSA refused to name the banks involved, but revealed that they accounted for more than 70 per cent of the complaints it receives and nearly two-thirds of those resolved by the Financial Ombudsman Service (FOS).
The most recent FOS complaints statistics showed that taxpayer-backed Lloyds Banking Group was the UK's most complained-about bank in the last six months of 2009.
Lloyds, which includes Bank of Scotland, attracted nearly 20,000 complaints in the six months to 31 December. Barclays, RBS and Santander, owner of Abbey, were also among the worst offenders.
The FSA's review of complaint handling found poor standards in most banks and said they had failed to learn from previous complaints.
Frontline branch staff are ill-equipped to deal with complaints and have no incentive to compensate customers even where it is clear the bank is at fault, according to the FSA.
Staff at two banks are encouraged to turn down valid complaints by pay structures rewarding them for meeting targets for the level of redress paid, said the FSA.
Overall, more than two-thirds of the complaints covered by the review were badly handled with 18 per cent resulting in an unfair outcome for the customer.
Dan Waters, director of conduct risk at the FSA, said: "While we found some good practice, there is clearly evidence of unacceptable standards of complaints handling in banks."
Mr Waters said there had long been concerns over the way banks handled complaints, and he accused senior management of failing to establish a culture of dealing with complaints properly.
"It is institutional and a serious issue from the top down. We found that, in many cases, there was a lack of management engagement and they did not have the right culture or practices."
The British Bankers' Association (BBA) admitted the industry was concerned by inconsistent complaint handling. Eric Leenders, executive director of retail banking at the BBA, said: "This is why both the FOS and the banks have started to publish detailed complaint information. We accept no-one wants to complain and every complaint represents a break in communication somewhere along the line."
Peter Vicary-Smith, chief executive of consumer group Which?, said: "This is another damning indictment of the banking industry, many of whose members consistently put sales before customer service."
The UK's high street banks are also singled out for criticism in research published today by Which? Money, which found the state-owned banks fell behind smaller lenders and building societies when it came to keeping mortgage customers happy.
Bank of Scotland, part of Lloyds Banking Group, recorded the lowest score in a survey of borrower satisfaction, with Halifax, Northern Rock and RBS close behind. The main complaints were from customers excluded from deals offered to new customers and not being informed about better deals when their existing mortgage ended.