LONDON - Britain’s Financial Conduct Authority fined Lloyds Banking Group on Wednesday about $46 million for failing to properly manage its compensation program so that its financial advisers were not encouraged to sell consumers products they didn’t need to meet sales targets.
The penalty of £28.04 million is the largest fine ever imposed by the regulator, or by its predecessor, the Financial Services Authority, for retail conduct failures.
The regulator said that systems at Lloyds were “inadequate†and “seriously flawed†to manage its incentive program, which rewarded financial advisers at its Lloyds TSB, the Bank of Scotland and Hailifax units with variable base salaries, bonuses and one-off payments for reaching sales goals.
“The findings do not make pleasant reading,†said Tracey McDermott, the F.C.A.’s director of enforcement and financial crime. “Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organization, so they must be designed with the customer at the heart.â€
The potential fine was increased by 10 percent because of prior warnings by the agency and a previous fine against its Lloyds TSB unit in 2003 related to the unsuitable sale of bonds because of general pressure to meet sales targets. But the fine, which could have topped £35 million, was ultimately reduced because the bank agreed to settle at an early stage.
Lloyds Banking Group said that as soon as these issues were identified in 2011 as part of a change in strategy, the company immediately made changes to ensure that customers were being advised properly. The bank said it had made substantial improvements to systems and controls governing incentives and cooperated throughout the F.C.A. investigation.
“The group recognizes that its oversight of these particular schemes during the period in question was inadequate and apologizes to its customers for the impact that they may have had,†the bank said. “We are determined to ensure that any customer impacts are dealt with quickly and fully.â€
As part of its findings, the British regulator said that 7 out of 10 advisers at Lloyds TSB and 3 out of 10 advisers at Halifax still received their monthly bonuses, even though the bank found a high proportion of sales were unsuitable or potentially unsuitable. The regulator looked at sales of investment and protection products between January 2010 and March 2012.
The regulator also found that 229 advisers at Lloyds TSB received a bonus even when all of their sales were deemed unsuitable or potentially unsuitable and 30 advisers received a bonus under those circumstances on more the one occasion.
Managers responsible for ensuring good sales practices also had their own performance measured against sales targets, creating a conflict of interest, the regulator said. Lloyds Banking Group has agreed to carry out a review of its advisers’ sales and reimburse customers where unsuitable sales took place.
