Lloyds Bank PLC

THE PENALTY 1.1 The FSA gave LTSB a Decision Notice dated 23 September 2003 which notified LTSB that, pursuant to section 206 of the Financial Services and Markets Act 2000 (the Act), the FSA had decided to impose a financial penalty on LTSB in the amount of £1,900,000. 1.2 LTSB has confirmed that it does not intend referring the matter to the Financial Services and Markets Tribunal. 1.3 Accordingly, for the reasons listed below and having agreed with LTSB the facts and matters relied upon, the FSA imposes a financial penalty of £1,900,000 on LTSB (the Penalty). REASONS FOR THE ACTION 2.1 The FSA has decided to impose the Penalty on LTSB in respect of breaches of SIB Adopted Rule S5.01 (the SIB Rule) and Principles 2 and 9 of the Statements of Principle of the Securities and Investments Board (the SIB Principles) arising from the sale of some 51,000 policies of the Extra Income and Growth Plan (EIGP) in four tranches between October 2000 and July 2001. In particular: 2.1.1 the EIGP was a new product with a medium/high risk rating designed by Scottish Widows Group (Scottish Widows) and distributed by the LTSB Branch Network (the Network) shortly after Scottish Widows was acquired by Lloyds TSB Group plc. 2.1.2 LTSB did not have in place sufficiently rigorous procedures and controls for considering all of the issues surrounding the selling of the EIGP, in that LTSB: i) did not emphasise sufficiently to the Network financial consultants the need for investors, when buying the EIGP, to have appropriately balanced portfolios and the need for investors to retain sufficient liquid resources (together concentration levels). In particular: a) there was not sufficiently bespoke guidance on acceptable concentration levels in LTSB's suitability rules in relation to the EIGP; b) there was not sufficiently specific training of Network financial consultants in terms of the suitability of the EIGP for investors on grounds of concentration levels; and c) in the absence of such guidance, the sales verification process did not identify potential unsuitable sales through the Network on grounds of concentration levels. ii) did not ensure an adequate balance between the general pressures of its sales targets and the suitability of EIGP for investors; and iii) failed to analyse the reasons for the high level of sales through the Network of Tranche 1 of the EIGP; 2.1.3 as a result, some 22,500 EIGP sales (44% of the total number of policies sold) were made through the Network to investors when it was an unsuitable product for them and LTSB has agreed, in the circumstances particular to this matter, to pay compensation in respect of: i) approximately 16,500 sales to investors who had not, before their purchase of the EIGP, purchased an equity related investment product and who purchased the EIGP with over 20% of their financial assets; and ii) approximately 6,000 sales to other investors who had, before their purchase of the EIGP, purchased one or more other equity related investment products and who purchased the EIGP with over 35% of their financial assets; 2.1.4 in relation to the EIGP, LTSB failed in the above respects to act with due skill, care and diligence and to 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; 2.1.5 in so doing, LTSB has demonstrated serious failings which demand a substantial financial penalty. These failings are viewed by the FSA as particularly serious in the light of the following factors: i) LTSB's failure to ensure that sufficiently adequate procedures and controls were put in place to sell the EIGP throughout the Network occurred notwithstanding that LTSB had clearly identified in advance the potential risk of misselling the EIGP and had put in place a number of measures intended to mitigate those risks; ii) LTSB's failure resulted in the EIGP being missold to a large number of inexperienced investors, exposing them to the risk of substantial loss; iii) specifically, the failings in respect of certain EIGP sales meant that: · approximately 84% of the total number of sales to customers who had no previous experience of equity related investment products resulted in such customers having over 20% of their total financial assets invested in the EIGP; and · approximately 18% of the total number of sales to customers who did have previous experience of equity related investment products resulted in such customers having over 35% of their total financial assets invested in the EIGP; 2.1.6 in deciding the level of penalty to be imposed, the FSA has recognised that these failings have been mitigated by LTSB. In particular: i) LTSB has co-operated fully with the FSA since the identification of these issues by the FSA in October 2001; ii) LTSB has conducted a comprehensive investigation into its sales of the EIGP; iii) LTSB has agreed to pay the compensation referred to in paragraph 2.1.3, at a total cost of approximately £98 million in respect of approximately 22,500 sales; iv) LTSB's conduct was not deliberate or reckless; and v) LTSB has put in place remedial steps to address the issues in relation to the EIGP referred to above. 2.2 It appears to the FSA having regard to its statutory objectives, which include the protection of consumers, that, in the circumstances, £1,900,000 is an appropriate financial penalty. Were it not for the remedial action taken by LTSB and for the co-operation demonstrated by LTSB resulting in the early settlement of the matter, the Penalty would have been significantly higher.