Lloyds Bank PLC

On 10 December 2013 the FCA imposed a combined financial penalty of £28,038,800 on Lloyds TSB Bank plc and Bank of Scotland plc (the Firms) for breaching Principle 3 of the FCA's Principles for Businesses. The breaches occurred between 1 January 2010 and 31 March 2012 (the Relevant Period). The Firms settled at an early stage of the FCA's investigation. They therefore qualified for a 20% (Stage 2) discount under the FCA's executive settlement procedures. Were it not for this discount, the penalty would have been £35,048,500. The penalty is due to serious failings in the Firms' systems and controls governing financial incentives given to sales staff in LTSB, Halifax and BOS branches. These staff sold protection and investment products to customers on an advised basis (advisers). Advisers' incentives included higher risk features, such as variable salaries and bonus thresholds (giving disproportionate rewards for marginal sales). It meant advisers who met sales targets qualified for substantial salary rises and bonuses, while advisers who did not faced salary reductions. There was also a significant bias towards sales of protection products. There was, therefore, a significant risk that, if not adequately controlled, advisers would make inappropriate sales to customers to reach salary and bonus thresholds. The Firms' systems and controls were not appropriately focused on these specific higher risk features. In particular, the Firms failed to supplement routine business monitoring with appropriately risk-based monitoring that also focused on the risk profile of advisers. Further, while advisers had to meet certain competency standards to be eligible for salary rises and bonuses, this control was flawed as advisers could meet the standards even where the Firms had identified issues with their sales. The Firms' failure to manage and control adequately the risks from advisers' incentives derived from serious deficiencies in their governance over this area. There was a collective failure of the Firms' senior management to identify sufficiently advisers' incentives as a key area of risk requiring specific and robust oversight. The Firms are carrying out a review of sales conducted by higher risk advisers during the Relevant Period, and will provide redress to customers where appropriate.