FCA issues its largest-ever fine for retail market activity to Lloyds – £28 million

Base salaries of advisors selling investment and protection products could be cut in half if targets were not met

UK financial regulator FCA has announced on Wednesday that it is imposing its largest-ever fine for misleading retail practices of £28,038,844 on Lloyds Banking Group members – Lloyds TSB Bank and Bank of Scotland. According to the FCA staff was put under pressure to hit targets in order to get bonuses or to keep their current position.

There was a dramatic case that made an investment adviser was forced to sell protection products to himself, his wife and a colleague in order to keep his position at the bank.

Between January 2010 and March 2012 associates at the three entities in question (including Halifax which is a subsidiary of Bank of Scotland) sold more than 1 million investment and protection products to about 740,000 clients totaling in premiums of about £2.3 billion in investments and £120 million for protection. Incentives behind these sales were variable base salaries plus individual and team bonus one-off payments and rewards.

Investment advisers’ salaries were depending on them meeting their sales targets and they could be automatically promoted or demoted if those were exceeded or not met. The FCA findings give an example for a for a Lloyds TSB adviser who is on a mid-level pay and has not been hitting 90% of sales targets over a period of 9 months. The base annual salary would drop from £33,706 to £25,927, and in case of a two levels demotion that would total £18,189 which is an almost 50% pay cut.

According to the FCA the systems and controls used to monitor these sales were inadequate and staff incompetence and complete ignoring of internal guidelines by managers who were in turn compensated based on their targets were the main reasons for the systemic malpractice.

In a drastic example the regulator presents us with findings that about 7 out of 10 advisers at Lloyds TSB have received their bonuses despite internal controls identifying big proportions of their sales as “unsuitable” or “potentially unsuitable”.

At the end the pyramid scheme of targets and incentives for employees and management have in fact resulted in total lack of control about conducting proper business practices. While the regulator recognizes the need of proper compensation incentives for employees, they should be wisely managed and firms need to ensure that systematic oversight is sufficient to mitigate corresponding risks.

The FCA is in the process of an investigation whether risks are properly managed currently and will be publishing its findings in the first quarter of 2014.

Since the firms have agreed to a settlement at an early stage they have qualified for a 20% discount to the total fine amounting £35,048,556.

For the full press release by the regulator visit FCA’s website.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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