The penalty concerned sales of high risk bonds through the bank's branch network; but it will do little to encourage the sale of financial services over the internet given that the bank's mistake was to sell 44% of the policies to individuals for whom it was an unsuitable product. Checking that a financial product suits a customer is a major challenge when selling over the internet.
The fine was for sales of the bank's Extra Income and Growth Plan. The product was designed by the Scottish Widows Group, acquired by Lloyds TSB in March 2000. It was distributed through the LTSB branch network between October 2000 and July 2001. In total, 51,00 policies were sold.
According to the FSA, Lloyds TSB did not have in place sufficiently rigorous procedures and controls for considering all of the issues surrounding the selling of the Plan.
Defects in the bank's guidance, training and sales verification processes meant that it did not ensure that its financial consultants stressed the need for investors in the Plan to have both appropriately balanced portfolios and a sufficient level of liquid resources, together known as the 'concentration levels'. Nor was it able to check that appropriate concentration levels were taken into account.
Lloyds TSB did not ensure an adequate balance between the general pressures of its sales targets and the suitability of the Plan for investors, nor did it analyse the reasons for the high level of sales through the branch network of the first of four tranches of the Plan.
As a result, some 22,500 sales - 44% of the total number of policies sold - were made through the branch network to investors when it was an unsuitable product for them. In the light of these failings, the bank has agreed to pay approximately £98 million to investors in compensation.
The FSA found that it failed to act in relation to the Plan with due skill, care and diligence. It did not have adequate arrangements to ensure that its financial consultants were adequately trained with regard to concentration levels and that it had sufficiently well defined compliance procedures.
In deciding the level of penalty to be imposed, the FSA took into account the fact that, while the bank's failings in this case were serious, Lloyds TSB had co-operated fully with the FSA. It had conducted a comprehensive investigation into its sales of the EIGP and had agreed to pay compensation.
Accordingly the fine was limited to £1.9 million. According to the Guardian, Lloyds TSB had prepared for much worse. It took a £300 million provision to cover potential redress for customers in the first half of the year and has set aside at least £800 million to cover pensions mis-selling in the last five years.
Andrew Procter, the FSA's Director of Enforcement, said:
"Firms must ensure that the products they recommend are suitable for an investor's individual circumstances and that any potentially unsuitable sales are identified. The procedure and controls to achieve this need to be especially rigorous where medium or high risk products are being offered to inexperienced investors."