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Lloyds Bank fined record £28m by FCA over toxic ‘sell or be demoted’ scheme

Sales staff under pressure to hit targets for bonuses or risk being demoted

The Financial Conduct Authority has fined Lloyds Banking Group £28 million over its aggressive bonus scheme.

The banking industry’s reputation suffered another hammer blow yesterday as City watchdogs fined Lloyds Banking Group a record £28m for operating a toxic culture that led one desperate salesman to mis-sell policies to himself, his wife and a colleague to avoid automatic demotion.

His fear was motivated by the fact that were a middle ranking advisor like him to fall by one tier in status, they would see their salary slashed to just £26,000 from £34,000 – a 23 per cent pay cut.

In a desperate bid to avoid a potentially devastating fall in income he missold huge life insurance, critical illness, and expenses on death cover to himself and his wife even though they couldn’t afford the premiums. 

He also sold a critical illness policy to a colleague in a Halifax branch which was subsequently cancelled.

The sales were pushed through in the final week of one of the bank’s three month quarters as he battled to avoid demotion. This had been made automatic for sales people who failed to hit targets across the three banks during the period regulators investigated from the start of 2010 until the end of March 2012.

The salesman’s struggles came at a time when his fellow salespeople were ramping up their efforts in a bid to win a regular “champagne” bonus paid every quarter to top performers.

The Financial Conduct Authority found that neither Halifax, Lloyds TSB or Bank of Scotland – all owned by Lloyds Banking Group – kept an eye out for bad sales at the end of a quarter.

Watchdogs described the risks to consumers of being pushed to buy inappropriate insurance products or investments at these times as “accute”. It also said that the banks “tolerated” poor sales practices and bad advice and was sharply critical of the fact that even salesmen who were found to have badly advised consumers could still be paid juicy bonuses.

Shockingly, 229 Lloyds TSB advisors got a bonus when all of their sales were classified as “advice fails” in one month. This happened on more than one occasion to 30 of them.

The three Lloyds-owned banks only monitored a tiny proportion of the sales made to check that they were compliant and the pay policies were imposed despite repeated warnings from regulators to steer clear of pay policies that encouraged bad behaviour. Over the period under investigation the banks sold £2.25bn of investment products and took in £118m in protection insurance premiums. As a group, Lloyds was ramping up the pressure as it had told the City it wanted to double customer numbers.

The FSA lambasted a “collective failing of senior management” in its final decision notice.

Tracy McDermott, the FCA’s director of enforcement, said: “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. Because there have been numerous warnings to the industry about the importance of managing incentives schemes, and because Lloyds TSB had been fined in 2003 for unsuitable sales of bonds, we have increased the fine by 10 per cent.”

In a statement Lloyds said it “accepts the findings of an FCA investigation into its historic systems and controls governing bancassurance legacy incentive schemes for branch advisers”. It added: “The Group launched its new strategy in 2011 to fully refocus the business on its customers. As part of that approach, the Group has been addressing historic issues and ensuring that customers get fair and appropriate outcomes.”