Lloyds: where toxic bonus targets made staff mis-sell to themselves

Regulator levies record £28m fine for scheme that encouraged aggressive sales

The banking industry's reputation suffered another 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 his salary would fall from £34,000 to £26,000 if he were demoted by one tier from his post as a middle-ranking adviser – a 23 per cent pay cut. He sold life assurance, 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, which was subsequently cancelled.

The sales were pushed through in the final week of one of the bank's quarters. Demotion for staff who missed targets was automatic across the three banks during the period regulators investigated from the start of 2010 until the end of March 2012.

Sales staff were also encouraged to win regular "champagne" bonuses 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 as "acute". It also said the banks "tolerated" poor sales practices 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 advisers 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.

The bank could consider clawing back bonuses as a result, although yesterday it would only say that "the Remuneration Committee will re-consider deferred awards if appropriate to do so before being released".

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.

In a statement Lloyds said it accepted the findingsand added: "The Group launched its new strategy in 2011 to fully refocus the business on its customers."