Bank of Scotland plc

On 15 February 2013 the FSA imposed a financial penalty of £4,315,000 on Lloyds TSB Bank Plc, Lloyds TSB Scotland Plc and Bank of Scotland Plc (together Lloyds Banking Group, LBG) by way of a single Final Notice. The penalty relates to LBG's failure to pay redress promptly to PPI complainants between 5 May 2011 and 9 March 2012 (the Relevant Period). LBG agreed to settle at an early stage of the FSA's investigation. It therefore qualified for a 30% (Stage 1) discount under the FSA's executive settlement procedures. Were it not for this discount, the FSA would have imposed a financial penalty of £6,164,327 on LBG. During the Relevant Period, LBG sent 582,206 decision letters to PPI complainants, agreeing to pay redress to them. In order to comply with its regulatory obligation to pay redress promptly, LBG aimed to make payment within 28 days of these decision letters. However, LBG failed to do so in up to 140,209 (24%) cases. 24,589 (4%) cases inadvertently dropped out of LBG's PPI redress payments process, and remedial action had to be taken subsequently to ensure those payments were made. These payments were identified as a result of customers telephoning LBG to chase payments and media attention. Following this, LBG carried out an investigation. LBG breached the FSA's Principles and rules by failing to: 1) take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems (Principle 3); and 2) comply promptly with offers of redress which LBG had made and which had been accepted by PPI complainants (DISP 1.4.1R(5)). In particular: (1) LBG failed to establish an adequate process for preparing redress payments to send to PPI complainants. In addition to a lack of initial planning by LBG, LBG's staff engaged on the redress process did not have the collective knowledge and experience to ensure that the process worked properly; (2) As a result, there were a number of serious deficiencies in LBG's PPI payment preparation framework. These deficiencies related to the way LBG processed data relating to customers' PPI redress payments before this data was sent to the separate payments area. LBG's system was heavily reliant on manual processes and data transfers which could not cope with high volumes of PPI payments of varying complexity. There was ineffective tracking of cases through the process and a lack of co-ordination between multiple redress sites. Customers' payment details were subjected to poor data governance and there was a lack of controls, including no control at all for the reconciliation of PPI payments. In addition, parts of the process were under resourced; (3) LBG failed to monitor effectively whether it was making all payments of PPI redress promptly. Nor did it gather sufficient management information to enable it to identify, in a timely manner, the full nature and extent of the payment failings; and (4) LBG's risk governance framework in respect of its process for preparing redress payments to send to PPI complainants was ineffective. An effective risk function would have assisted LBG to identify and address, in a timely way, the systems and controls deficiencies in its process. As a result of these failings, up to 140,209 (24%) customers whose complaints were upheld in full or in part were not paid redress within 28 days of LBG's decision letters to customers. Approximately 87,000 (15%) of these customers had to wait over 45 days, 56,000 (9.7%) over 60 days, 29,000 (5%) over 90 days and some 8,800 (1%) over 6 months (these have subsequently been paid, other than where they involve exceptional customer circumstances and are still being addressed). Although LBG has taken steps to ensure that these customers have not been financially disadvantaged by the delays by paying interest at 8% per annum on the outstanding redress figure where appropriate, the average redress due to each customer was £2,733 and customers wereonvenienced by the delay. When customers telephoned LBG to enquire about the non-receipt of the payments they had been expecting, the deficiencies in its processes meant that LBG was unable to fast-track the payment to the customer, inform them when payment would be made, or explain why it had been delayed. LBG has since completed a comprehensive reconciliation of its PPI redress payments to ensure that all customers due PPI redress have been correctly paid and compensated for any delay in receiving their payment. Once the deficiencies in its process had been identified, LBG quickly conducted the reconciliation review and improved its processes to address the failings identified in this notice, including the rapid implementation of a PPI payment validation tool intended to ensure that any future issues regarding delayed payments are immediately identified and corrected.