Lloyds Banking Group has been referred to the Financial Services Authority's enforcement division for "serious failings" in the way it paid commission to its sales staff.
The move is the first act by the new get-tough regulatory regime launched yesterday by the incoming City watchdog boss Martin Wheatley. As predicted by The Independent on Tuesday, he has given notice to Britain's banks that they must end the commission culture which has led to widespread mis-selling.
Mr Wheatley, currently managing director of the FSA, warned bankers: "We intend to change the culture of viewing consumers as simply sales targets and I am going to be personally involved in getting it right."
He reported that a review of the incentive schemes run by 22 banks, building societies, insurers and investment firms led to the action against Lloyds. Other institutions have been told to check past sales to see if mis-selling occurred.
Lloyds yesterday said: "Since the FSA began its review in summer 2011 we have been working closely with them. From the start of this year we have made significant changes to our incentive schemes."
Examples of poor practice featured in the FSA's report included one bank where sales staff were handed a 100 per cent bonus for the sale of loans and PPI, but only if they had sold PPI to at least half their customers.
The PPI scandal has cost Britain's high street banks £10bn in compensation payments to consumers.
"What we found is not pretty," Mr Wheatley said. "Most of the incentive schemes we looked at were likely to drive people to mis-sell."
Richard Lloyd, Which? executive director, said: "Most banks have incentive schemes that prioritise sales over service. This has driven mis-selling and has led to serious failings for consumers. This must change."
Mr Wheatley yesterday promised further supervisory work and a wider review of incentive schemes. The FSA has set up a consultation on the issue giving firms until the end of October to respond.
But Adam Phillips, the chairman of the Financial Services Consumer Panel, demanded swifter action from the City watchdog. "The FSA has been slow to respond," he said. "Consumers continue to suffer from the inappropriate pay and bonus practices in banks. Incentives that encourage client-service staff to make a profit at the expense of the customer need to be removed now."