The Financial Conduct Authority (FCA) has fined Lloyds TSB Bank plc and Bank of Scotland plc, both part of Lloyds Banking Group (LBG), £28,038,800 for serious failings in their controls over sales incentive schemes. The failings affected branches of Lloyds TSB, Bank of Scotland and Halifax (which is part of Bank of Scotland).
This is the largest ever fine imposed by the FCA, or its predecessor the Financial Services Authority (FSA), for retail conduct failings.
The incentive schemes led to a serious risk that sales staff were put under pressure to hit targets to get a bonus or avoid being demoted, rather than focus on what consumers may need or want. In one instance an adviser sold protection products to himself, his wife and a colleague to prevent himself from being demoted.
Tracey McDermott, the FCA’s director of enforcement and financial crime, commented:
"The findings do not make pleasant reading. Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation, so they must be designed with the customer at the heart. The review of incentive schemes that we published last year makes it quite clear that this is something to which we expect all firms to adhere.
"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 ten per cent.
"Both Lloyds TSB and Bank of Scotland have made substantial changes, and the reviews of sales and the redress now being made should right many of these wrongs."
The FCA found that both firms had higher risk features in their advisers’ financial incentive schemes which were not properly controlled. This created a significant risk that advisers would maintain or increase their salaries, and earn bonuses, by selling products to customers that they did not need or want.
The FCA increased the fine by 10 per cent because:
- The previous regulator, the FSA, had warned about the use of poorly managed incentive schemes over a number of years; and
- The firms’ previous disciplinary record, including an FSA fine on Lloyds TSB Bank plc for the unsuitable sale of bonds in 2003 caused in part by the general pressure to meet sales targets.
The FCA has an objective to protect consumers and the changes made by the firms since the investigation will help ensure their customers are treated better in future. The FCA expects all financial incentive schemes to be designed carefully with good customer outcomes in mind, and the risks they pose must be identified and managed properly.
Both firms have agreed to carry out a review of higher risk advisers’ sales and pay redress where unsuitable sales took place. It is not yet possible to say how much redress will be paid until the firms have identified how many customers are affected. Customers do not need to take any action at this stage to be included in the review and they will be contacted by the firm in due course.
More detail on the FCA’s investigation
The FCA’s investigation focused on advised sales of investment products (such as share ISAs) and protection products (such as critical illness or income protection) between 1 January 2010 and 31 March 2012.
During this period:
- Lloyds TSB advisers sold more than 630,000 products to over 399,000 customers, who invested about £1.2bn and paid £71m in protection premiums.
- Halifax advisers sold over 380,000 products to more than 239,000 customers, who invested around £888m and paid £38m in protection premiums.
- Bank of Scotland advisers sold over 84,000 products to over 54,000 customers, who invested around £170m and paid £9m in protection premiums.
The incentive schemes rewarded advisers through variable base salaries, individual and team bonuses and one-off payments and prizes.
Systems and controls used by the firms to manage the incentive schemes were inadequate. While advisers were required to meet certain competency standards to be eligible for promotions and bonuses, this control was seriously flawed and seven out of ten advisers at Lloyds TSB and three out of ten at Halifax still received their monthly bonus even though a high proportion of sales were found - by the firms themselves - to be unsuitable or potentially unsuitable. Further, 229 advisers at Lloyds TSB received a bonus even when all of their assessed sales were deemed unsuitable or potentially unsuitable; and 30 advisers received a bonus in the same circumstances on more the one occasion.
The managers that were responsible for ensuring good practice by advisers also had their own performance measured against sales targets - a clear conflict of interest that needed careful management.
The FCA recognises that firms may want to incentivise staff to sell but the risks inherent in any incentive scheme, however well designed, must be managed. In this case the scheme presented significant risks but the firms did not ensure that their systems and controls were sufficient to mitigate those risks.
In September 2012 the FSA published a review into sales incentives, highlighting some of the poor practices used by firms across the retail market including some of the UK’s biggest financial institutions. One institution was referred to enforcement and the FCA can confirm that was LBG.
The FCA is currently conducting follow up work to see if firms are now managing the risks to consumers from sales based incentives and plans to publish the findings in the first quarter of 2014.
The firms agreed to settle at an early stage and therefore qualified for a 20 per cent discount. Without the discount the total fine would have been £35,048,556.
Notes for editors
- The Final Notice for Lloyds TSB Bank plc and Bank of Scotland plc[1].
- The FCA has fined Lloyds TSB Bank plc £16,407,300 and Bank of Scotland plc £11,631,500, which together is £28,038,800.
- The Bank of Scotland plc sales referred to in the Final Notice were made in Halifax and Bank of Scotland branches.
- Examples of incentive schemes:
- Variable base salaries
Advisers could be automatically promoted and get a pay increase or be automatically demoted and have a pay reduction depending on their sales performance. For a Lloyds TSB adviser on a mid-level salary, not hitting 90% of their target over a period of 9 months could see their base annual salary drop from £33,706 to £25,927; and if they were demoted by two levels their base pay would drop to £18,189 – almost a 50 per cent salary cut. In the worst example that the FCA saw, an adviser sold protection products to himself, his wife and a colleague in order to hit his target and prevent himself from being demoted. - Bonus thresholds
Both firms had in place thresholds that meant should a certain sales target be reached large bonuses could be earned. At Lloyds TSB this incentive was called the ‘champagne bonus’ and could see an adviser receiving 35% of their monthly salary as a bonus as soon as they reached their sales target. - One-off payments and prizes
In one month advisers at Halifax and Bank of Scotland had the opportunity to win a one-off payment of £1000, known as a ‘grand in your hand’, for meeting a particular target. - Product bias
There was a significant bias in incentives towards sales of protection products, which was a strategic area of focus for the firms. At Halifax and Bank of Scotland, an adviser could receive around double the sales points for the average protection product sale compared to the average investment product. While average sums invested were higher for investments products than protection products, this equated to 23 times more sales points for each £ of premium. Staff gained sales points for each product they sold, and the amount of points would vary depending on the product sold, the amount invested or protection premium paid. The more products they sold, the more points they received, and the closer an adviser would be to reaching their target and bonus.
- Variable base salaries
- In September 2012 Martin Wheatley gave a speech about sales incentives[2].
- In January 2013 the FSA published Final Guidance[2], detailing good and bad practice in sales incentives.
- Lloyds TSB Bank plc was fined for unsuitable sales of bonds[3] in 2003.
- As well as the Lloyds TSB Bank plc fine in 2003, the FSA published numerous warnings about the use of incentive schemes:
- Treating customers fairly – building on progress[3] (July 2005)
- The sale of payment protection insurance – results of thematic work[5] (November 2005)
- ‘The sale of critical illness cover: results of thematic work[6] (May 2006)
- Treating customers fairly – culture[-2] (July 2007)
- Liverpool Victoria Banking Services – Final Notice[-1] (July 2008) and
- Alliance & Leicester – Final Notice[0] (October 2008)
- On the 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA, as well as how it is different to the PRA.