A record fine has been levied against the Lloyds Banking Group for its shocking bonus schemes. Never before has the Financial Conduct Authority (FCA) levied such a substantial fine for conduct-related issues. The total £28m fine was levied in parts. Lloyds TSB is to pay a fine of £16.4m while HBOS is to pay £11.6m. The Lloyds Banking Group was formed in January 2009 when Lloyds TSB took over the Halifax Bank of Scotland (HBOS) with the help of a £20bn bailout funded by the taxpayers. The bank group is now 33-percent taxpayer-owned.

Investment & Financial Product  Mis-Selling

It is also estimated that the bank group will spend £100m on a many as 700,000 customers that purchased about £2bn in mostly unneeded financial products between January 2010 and March 2012. These products included illness and/or income cover and share ISAs.

However, the collective impact of all the expenses associated with the scandal has been downplayed by Lloyds. It asserted that the overall costs, including the fines, will total less than £200m. It suggested that this amount would not have a “material impact on the group.”

Tracey McDermott, the FCA’s director of enforcement and financial crime, asserted that the overall £28m levy had been expanded by 10-percent due to Lloyds failure to heed past warnings about its sales practices. McDermott stated that consideration was also given to the fact that Lloyds and faced sanctions a decade ago for its questionable sales incentives back then. “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,” McDermott said.

The sales-driven misconduct included:

A scheme dubbed “a grand in your hand,” in which advisers could get a one-off payment of £1,000 for achieving stated sales goals.
A so-called “champagne bonus” designed to further motivate sales advisers. The bonus was calculated at 35-percent of monthly salary and paid out when sales targets were met.
A case in which an adviser sold unneeded financial protection products to his wife, to a co-worker and to himself to try to avoid a potential demotion.

With the various bonuses paid out, some sales advisers were able to earn in excess of £70,000 per year. The FCA cited examples of Bank of Scotland staff getting more than £7,000 per month, and Halifax staff receiving in excess of £30,000 in a given quarter. It is estimated that over 400 of the bank’s sales advisers were involved in the schemes, more than 10-percent of the total.

In addition to the fines, it is also likely that directors’ bonuses will also be clawed back. Among those facing a loss of bonuses is the current chief executive, Antonio Horta-Osorio. He was in charge for the final 12-months before the schemes were stopped. Horta-Osorio had assumed his post in March 2011. He was just recently paid a £2.3m share bonus related to an increase in the bank’s share price.

A Lloyds spokesperson indicated that the matter of directors’ bonuses would be taken up at an upcoming remuneration committee meeting in January. The representative stated that, “the impact of the sales bonuses and potential redress will be considered at the January remuneration committee.”

Lloyds proactive measures at present include contacting all customers that were affected. The bank released a statement that asserted, “We are already contacting customers, and will continue to contact potentially affected customers over the coming months. Customers do not need to take any action at this stage to be included in the review and they will be contacted in due course.” The bank also states that it is considering customer compensation on a case-by-case basis.

Unions weighed in on the matter, stating that they have long campaigned against such sales targets. Unite national officer, Dominic Hook, said, “Despite the countless reports and investigations into the conduct of the banks the industry clearly has not learned the lessons of the financial crisis nor heard the concerns of customers and staff in order to adequately change.” Unite officials want all such sales bonuses abolished.

Previously, in 2012, the FCA had published the findings of its overall incentive schemes review. It reminded all firms of the absolute need to refrain from selling customers financial products that they did not want. Such schemes, the FCA said, reflect on what management values. Therefore, such misguided incentives influence the very culture of an organisation. The FCA expects all financial firms to adhere to its recommendations in the future.

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Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim

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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.