Lloyds gets record £100m fine for mis-selling 'precipice' bonds

Lloyds TSB was yesterday handed a record £100m fine and compensation bill by the City regulator for mis-selling high-risk investment bonds.

The bank has been bracing itself for the weighty fine for some time, after a lengthy investigation by the Financial Services Authority into sales of its Extra Income and Growth Plan.

Such investments, which have been dubbed "precipice bonds" by the regulator, offer investors high levels of income but their capital is at risk if stock markets fall. Scottish Widows provided the bond to the Lloyds branches.

The FSA yesterday said it had fined the bank £1.9m for failings in its sales process, the largest fine the regulator has imposed for product mis-selling, and ordered it to pay £98m to 22,500 customers.

The FSA found that nearly half of all sales were to customers for whom it was an unsuitable product.

Between October 2000 and July 2001, 51,000 policies were sold in Lloyds branches worth a total of £1bn.

Lloyds was found to have been selling the products to unwitting investors who had little or no experience of the stock market and its risks.

It also allowed customers to plough large amounts of their assets into a single investment. The bond invested in a basket of 30 stocks and offered up to 10.25 per cent income a year, providing none of the stocks fell more than 33 per cent and did not recover to their starting levels.

The stocks included Vodafone, Marconi and Prudential, which have all plummeted in the past three years. Investors have lost between 30 and 48 per cent of their capital from the bond. The FSA blamed Lloyds for not training its staff properly to warn potential investors of the downside risks, and for allowing sales targets to be as important as suitability to the customer.

More than 16,000 customers had never before bought an equity investment and were encouraged to put more than 20 per cent of their assets into the bond. Six thousand customers who had only a little experience of equities were allowed to invest 35 per cent of their total assets in the single bond.

"Firms must ensure that the products they recommend are suitable for an investor's individual circumstances.

The controls to achieve this need to be especially rigorous where medium or high-risk products are being offered to inexperienced investors," Andrew Procter, the director of enforcement at the FSA, said yesterday.

The authority has issued repeated warnings on the danger of precipice bonds to investors. Other firms are still being investigated and may also be fined.

Lloyds yesterday said it was "very sorry that this situation arose". It is in the process of contacting all customers that bought the bonds to inform them whether they are in line for compensation.

The group has a poor mis-selling record. It put aside £300m earlier this month to cover potential mis-selling awards, from which yesterday's bill will be paid. The rest is to cover potential compensation for the mis-selling of endowments. It also received one of the largest bills for pension mis-selling. The fine comes only two days after Mike Ross, the chief executive of Scottish Widows, was ousted from his job in a restructuring of the group.

In a separate move, Lloyds is moving 1,500 back office jobs to India. The bank already has 250 people working in Bangalore, but has now announced plans to raise this to 1,500 by the end of 2004.

It has promised to ensure all jobs are transferred through natural turnover and not replacing contract staff. Other divisions within the group are also considering the move, including Cheltenham & Gloucester and Scottish Widows.