The Financial Conduct Authority (FCA) has found that certain Lloyds Banking Group (LBG) firms did not properly control higher risk features in financial incentive schemes for their staff, which resulted in advisers selling products to customers that they did not need or want in order to maintain or increase their salaries and earn bonuses.
The FCA, a regulatory body for the financial services industry in the UK, revealed on Wednesday that it has fined Lloyds TSB Bank plc GBP16,407,343 and Bank of Scotland plc GBP11,631,501, a total of GBP28,038,844 and the largest ever fine imposed by the FCA, for failing to ensure that their systems and controls were sufficient to mitigate risks in staff incentive schemes. Branches of Lloyds TSB, Bank of Scotland and Halifax (part of Bank of Scotland) were affected by the failings.
Lloyds incentive schemes reportedly led to a serious risk that sales staff were pressurised to meet targets to receive a bonus or avoid demotion, which resulted in customers being sold financial products that they did not need or require. For example, a Lloyds TSB adviser on a mid-level salary who failed to reach 90% of their target over a period of 9 months could have their base annual salary reduced from GBP33,706 to GBP25,927. If an advisor was demoted by two levels, their base pay would drop to GBP18,189, which would have equated to nearly half their salary being cut. One adviser is said to have sold protection products to himself, his wife and a colleague to prevent himself from being demoted.
The FCA added that the fine was also increased by 10% because the previous regulator, the FSA, had warned about the use of poorly managed incentive schemes over several years. Also, a previous disciplinary record, including an FSA fine on Lloyds TSB Bank plc for the unsuitable sale of bonds in 2003, was caused in part by the general pressure to meet sales targets. However an early stage settlement has been agreed, which means the firms qualified for a 20% discount. Without this discount the fines would have amounted to GBP35,048,556.
Tracey McDermott, the FCA’s director of enforcement and financial crime, stated:
“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 that we published last year makes it quite clear that 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.
“Both Lloyds TSB and Bank of Scotland have made substantial changes, and the reviews of sales and the redress now being made should right many of these wrongs.”