The FCA has fined Lloyds Banking Group over £28m over “serious failings” related to its sales incentives schemes.
This is the largest ever fine imposed by the FCA or the FSA for retail conduct failings.
The regulator says the incentive schemes run by Lloyds 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.
It cites one case where an adviser sold protection products to himself, his wife and a colleague to prevent himself from being demoted.
The FCA increased the fine against Lloyds by 10 per cent because the FSA had previously warned about the use of poorly managed incentive schemes over a number of years. The penalty was also increased in light of Lloyds’ previous disciplinary record, including an FSA fine against Lloyds TSB Bank for the unsuitable sale of bonds in 2003 caused in part by the general pressure to meet sales targets.
The fine is equivalent to 15 per cent of the bank’s revenue from selling investment and protection products through its bancassurance channel over the revelvant period of 1 January 2010 to 31 March 2012. Lloyds made a profit of £212.4m from the products over the period.
The investigation focused on advised sales of investment products, such as share Isas, and protection products such as critical illness or income protection between January 2010 and 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.
Incentive schemes rewarded advisers through variable base salaries, individual and team bonuses and one-off payments and prizes.
The regulator found that seven out of ten advisers at Lloyds TSB and three out of ten 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.
Some 229 advisers at Lloyds TSB received a bonus even when all of their assessed sales were deemed unsuitable or potentially unsuitable; and 30 advisers received a bonus in the same circumstances on more than one occasion.
Lloyds TSB and Bank of Scotland have agreed to carry out a review of higher risk sales and pay redress where appropriate.
FCA’s director of enforcement and financial crime Tracey McDermott says: “The findings do not make pleasant reading. Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation, so they must be designed with the customer at the heart. The review of incentive schemes we published last year makes it quite clear this is something to which we expect all firms to adhere.
“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 FSA published a review into sales incentives in September 2012, which found that 20 of 22 firms reviewed operated sales incentives schemes that increased the risk of misselling.
It emerged at the time that Lloyds was being investigated over its sales incentives.
In a statement, Lloyds Banking Group says: “As soon as these issues were identified in 2011, the group acted immediately to make significant changes to ensure all its schemes focused on doing the right things for customers and providing good service. The FCA has acknowledged we have made substantial improvements to systems and controls governing incentives.
“The group has already commenced a review to address potential customer impacts that may have occurred as a result of these failings. We are already contacting customers, and will continue to contact potentially affected customers over the coming months.
“The group recognises its oversight of these particular schemes during the period in question was inadequate and apologises to its customers for the impact that they may have had. We are determined to ensure any customer impacts are dealt with quickly and fully.”