The Financial Conduct Authority has fined Lloyds Banking Group £28m for a catalogue of “serious failings” related to its sales incentive schemes.
Automatic demotion for failing to meet targets, uncapped bonuses and one-off payments including a ‘grand in your hand’ competition led to a serious risk of advisers misselling products, the regulator found.
The fine is the largest ever imposed by the FCA or FSA for retail conduct failings and was increased by 10 per cent because the FSA had warned over a number of years about the use of poorly managed incentive schemes.
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.
The fine equates to 15 per cent of the £212.4m that Lloyds earned in revenue from the products over the relevant period.
The investigation found that Lloyds TSB automatically demoted advisers who had consistently failed to meet 90 per cent of their sales targets over a nine-month period.
If advisers were demoted, they would stay on reduced basic salaries for at least nine months. A middle-tier adviser demoted by one tier would see their salary fall by 23 per cent, from £33,706 to £25,927.
In 2011, 139 advisers were demoted by one tier and four were demoted by two tiers.
Advisers could also face bonus deficits which had to be repaid if they chose to receive bonus payments early and later failed to meet all their targets. In one case, an adviser sold protection products to himself, his wife and a colleague to avoid being demoted and having to repay a bonus deficit of almost £5,000.
The regulator 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 to be unsuitable or potentially unsuitable.
The FCA says the bank should have monitored sales by advisers who were at risk of demotion or close to reaching sales targets.
FCA director of enforcement and financial crime Tracey McDermott says: “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.”
In a statement, Lloyds Banking Group says: “The group has already commenced a review to address potential customer impacts that may have occurred as a result of these failings.
“The group recognises that its oversight of these particular schemes during the period in question was inadequate and apologises to its customers for the impact they may have had.”
Aurora Financial Planning chartered financial planner Aj Somal says: “I am not surprised by these findings. These practices are endemic at some large firms.”
Champagne bonuses and a grand in your hand
Advisers were incentivised through variable base salaries, individual and team bonuses, and one-off prizes.
Lloyds TSB advisers were given a ‘champagne bonus’ – that is, an extra bonus for themselves and their team – if they achieved 100 per cent of their sales targets over a three-month period.
In September 2010, advisers were offered a ‘grand in your hand’ competition, whereby those who met sales targets for the month received an additional £1,000.
Advisers also earned more sales points for protection policies with longer terms and larger values, and had to meet product mix targets to qualify for additional bonuses. This required them to sell 1.5 to two times as many protection products as savings and investment products.
The largest individual bonus for an adviser in the relevant period was £30,485 over a quarter – 264 per cent of the adviser’s salary.