The U.K. Financial Conduct Authority (FCA) has fined Lloyds Banking Group £64 million (U.S. $80 million) for its failure to adequately protect struggling mortgage clients.

Lloyds Bank, Bank of Scotland, and its offshoot The Mortgage Business—all part of the same group—failed to take struggling customers’ financial circumstances into account when arranging repayments between April 2011 and December 2015, according to the FCA. Over 250,000 customers with mortgage arrears may have been adversely impacted.

A sample review of 100 customer files from 2014 to 2015 found there was unfair treatment in 38 percent of them.

The fine—reduced by 30 percent from £91.5 million (U.S. $115 million) due to the banks’ early acceptance—is the third largest handed out by the FCA in the past five years and is one of the largest penalties imposed by the regulator in its eight-year history not related to anti-money laundering failings or exchange rate rigging.

On top of the penalty, the banks estimate they have already paid around £300 million (U.S. $376 million) to compensate some 526,000 customers affected by their poor practices.

“The FCA is very mindful of the impact of pandemic-related issues, and treating customers fairly remains a high priority for it. We can expect to see the regulator come down hard on rough treatment of customers by financial institutions during the current economic difficulties.” 

Tom Snelling, Partner, Signature Litigation

In a statement, Lloyds Banking Group said: “We have contacted all customers who were affected between 2011 and 2015 to apologise and have already reimbursed all who were charged fees at the time. Customers do not need to take any action. We have since taken significant steps to enhance how we support mortgage customers experiencing financial difficulty, including investing in colleague training and procedures.”

According to the FCA, shortcomings in the banks’ systems and procedures meant during the four-year period call handlers were not always provided with adequate information to assess customers’ circumstances or whether they could afford to make the mortgage repayments. This meant there was a risk that customers were treated unfairly.

Additionally, the banks’ system allowed call handlers to accept a minimum percentage of interest on top of customers’ monthly mortgage repayments without anybody senior signing off. In practice, this “inflexibility in approach” meant the banks did not adjust this percentage to take customers’ financial circumstances into account.

These risks were made worse after the banks lost a lot of their in-house mortgage expertise when they made staff redundant as part of a cost-cutting program. Nearly all of the replacement call handlers were new to the role and inexperienced.

The banks self-identified some of the problems as early as 2011, but the steps they took failed to fully rectify the issues. The same failings were then identified by the FCA as part of a thematic review in 2013.

During 2014 and 2015 the banks took a number of further steps to address the FCA review findings, telling the regulator they were on course to implement necessary improvements.

A further review by the FCA in July 2015, however, found the banks had failed to make sufficient progress in addressing the problems. As such, they were required to undertake a “Skilled Person’s” review, whereby the FCA checks the competency of people working in specific roles in financial services firms.

In July 2017 the banks implemented a group-wide customer redress scheme that included refunding all broken payment arrangement fees, arrears management fees, and interest accrued on the fees, as well as the refund of litigation fees if applied unfairly or, in some circumstances, automatically.

The FCA says “the fair and appropriate treatment of customers experiencing financial difficulty remains a focus” and says “firms should ensure there is appropriate investment in their staff who work in collections and recoveries, including in training and effective management information, to allow firms to monitor customer outcomes and take appropriate action where needed.”

The FCA says it “recognises the challenges firms face in this area posed by coronavirus (COVID-19), which only heightens the importance of firms treating customers in financial difficulty fairly and appropriately.”

In a statement, Mark Steward, the FCA’s executive director of enforcement and market oversight, said: “Banks are required to treat customers fairly, even when those customers are in financial difficulties or are having trouble meeting their obligations. By not sufficiently understanding their customers’ circumstances the banks risked treating unfairly more than a quarter of a million customers in mortgage arrears, over several years. In some cases, customers were treated unfairly, including vulnerable customers.”

In a general warning, Steward added that “firms should take notice of the action we have taken today to ensure that their own treatment of customers meets our expectations.”

Lawyers say financial services firms should heed the warning carefully. “The FCA is very mindful of the impact of pandemic-related issues, and treating customers fairly remains a high priority for it,” says Tom Snelling, a partner at law firm Signature Litigation. “We can expect to see the regulator come down hard on rough treatment of customers by financial institutions during the current economic difficulties.”

Experts also warn firms against believing the regulator has been unduly slow in imposing its penalty some nine years after first being aware of the problem and five years after it last reviewed the banks’ progress.

Nikolaos Antypas, a lecturer in finance at Henley Business School, says the length of time is purely indicative of the “complexity” of the case and the nature of “resource-intensive investigations.”

Snelling adds that “alongside these types of investigations, the FCA has also been dealing with legacy issues from the financial crisis over 10 years ago. It has needed to prioritize resources and that has slowed progress on a number of investigations.”