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The FSA has imposed a punitive £7m fine on the Alliance & Leicester for alleged failings in its payment protection insurance.

The swingeing fine, which the City watchdog hopes will be a deterrent to other providers, is by far the biggest to be handed out by the FSA. The previous biggest was the £1.09m fine handed out to HFC Bank in January.

According to the FSA, for three years from January 2005 to December 2007 Alliance & Leicester sold about 210,000 payment protection insurance policies to customers seeking a personal loan at an average price of £1265.

However, the regulator has judged there was a general failure by advisers to give customers details of the cost of payment protection insurance. In addition, Alliance & Leicester sought to find reasons to sell payment protection insurance without properly considering what customers needed.

The FSA stated Alliance & Leicester did not make it sufficiently clear that payment protection insurance was optional and it trained its staff to put pressure on customers where they queried the inclusion of payment protection insurance in its quotation or challenged advisers' recommendations.

These failings resulted in unacceptable levels of non-compliant sales and a high risk of unsuitable sales in the three-year period.

PPI fines

Source: FSA

Alliance & Leicester has apologised for the failings, stating it will be contacting affected customers.

In a statement it said: "I apologise sincerely for our shortcomings. We will be writing to every customer concerned and will be working with independent accountants and the FSA to ensure that we put right any disadvantage identified.

"Customers can be assured that we are taking this matter very seriously and that we have reviewed and tightened up our processes from December 2007 to ensure that all customers get the right information and advice."

The retail bank's fine represents a sevenfold jump on the HFC fine yet while the latter impacted 163,000 payment protection insurance policies, Alliance & Leicester's stood at 211,000, a rise of only a third.

Despite its statement, a spokesman for the FSA acknowledged the fine did not represent the number of policies impacted yet said the figure reflected the value of the policies in the period.

He said: "We have said since our thematic review that we would want to impose fines which served as a deterrent. As with all things, the ability to pay is important and the average cost of the policies sold were higher than HFC Bank.

"More customers were exposed to the failings and this must be remembered."

The FSA would not comment on its own final notices which show the average cost of an affected Alliance & Leicester policy stood at £1265 while that of HFC came to £2100.

Since last September, the FSA has fined 18 firms for payment protection insurance failings including providers such as Liverpool Victoria Banking Services, £840,000, and Capital One Bank (Europe), £175,000.

Banks have recently hit back at "punitive measures" with threats to take the Office of Fair Trading to the House of Lords over its stance on payment protection insurance.

An spokesman for the Association of Britsh Insurers said: "Of course people should understand what their options are and what they are being sold. Insurers are working hard with lenders, outlets selling payment protection insurance and other trade bodies to improve consumer experiences.

"Mis-selling is never acceptable. But let us remember that in the current economic climate, it is more important than ever that people have adequate protection to cover their financial commitments in case of redundancy or ill health. People should have clear and concise information to help them consider all their protection insurance options, including payment protection insurance.

The British Bankers' Association refused to comment on "individual cases".