The Financial Conduct Authority has fined Lloyds TSB Bank and Bank of Scotland, both part of Lloyds Banking Group, more than £28m - the largest ever fine for retail conduct breaches - over serious failings in their controls over sales incentive schemes.
According to the regulator, the failings affected branches of Lloyds TSB, Bank of Scotland and Halifax, which is part of Bank of Scotland.
The regulator found incentive schemes at the group led to a serious risk that sales staff were put under pressure to hit targets to get a bonus or avoid being demoted, rather than focus on what consumers may need or want.
In one instance an adviser sold protection products to himself, his wife and a colleague to prevent himself from being demoted.
An FCA review found that seven out of 10 advisers at Lloyds TSB and three out of 10 at Halifax still received their monthly bonus even though a high proportion of sales were found - by the firms themselves - to be unsuitable or potentially unsuitable.
Moreover, 229 advisers at Lloyds TSB received a bonus even when all of their assessed sales were deemed unsuitable or potentially unsuitable, while 30 advisers received a bonus in the same circumstances on more the one occasion.
The FCA said it had increased the fine by 10 per cent in part because Lloyds has a poor previous disciplinary record, including an FSA fine on Lloyds TSB Bank plc for the unsuitable sale of bonds in 2003 “caused in part by the general pressure to meet sales targets”.
It added that the previous regulator, the Financial Services Authority, had warned about the use of poorly managed incentive schemes over a number of years.
Both firms have agreed to carry out a review of higher risk advisers’ sales and pay redress where unsuitable sales took place. The FCA said it is not yet possible to say how much redress will be paid until the firms have identified how many customers are affected.
The FCA’s investigation focused on advised sales of investment products and protection products between 1 January 2010 and 31 March 2012.
During this period:
• Lloyds TSB advisers sold more than 630,000 products to over 399,000 customers, who invested about £1.2bn and paid £71m in protection premiums
• Halifax advisers sold over 380,000 products to more than 239,000 customers, who invested around £888m and paid £38m in protection premiums
• Bank of Scotland advisers sold over 84,000 products to over 54,000 customers, who invested around £170m and paid £9m in protection premiums
The managers that were responsible for ensuring good practice by advisers also had their own performance measured against sales targets, which the FCA said created a “clear conflict of interest”.
In September 2012 the FSA published a review into sales incentives, highlighting some of the poor practices used by firms across the retail market including some of the UK’s biggest financial institutions.
At the time Martin Wheatley, now chief executive of the FCA, said most incentive schemes would be likely to drive mis-selling and warned that firms were not properly managing the risks involved.
The FCA is currently conducting follow up work to see if firms are now managing the risks to consumers from sales based incentives and plans to publish the findings in the first quarter of 2014.
The firms agreed to settle at an early stage and therefore qualified for a 20 per cent discount. Without the discount the total fine would have been £35m.
