The Financial Services Authority (FSA) has fined three Lloyds Banking Group (LBG) firms a total of £4.3m for failings that resulted in up to 140,000 customers receiving delayed payment protection insurance (PPI) redress.
The three firms are Lloyds TSB Bank, Lloyds TSB Scotland and Bank of Scotland.
Between May 2011 and March 2012, LBG sent more than 580,000 decision letters to PPI complainants agreeing to pay redress to them.
FSA rules state that redress must be paid promptly and, in line with that, LBG aimed to make payment within 28 days.
However, a series of failures meant that not all customers were paid redress within that time frame.
While up to 140,209 customers - nearly a quarter - received payment after 28 days about 87,000 had to wait more than 45 days.
Some 56,000 had to wait more than 60 days, 29,000 more than 90 days and 8,800 more than six months.
Of the total, 24,589 payments "inadvertently dropped out" of the process and LBG had to take action to ensure the payments were made. The payments were identified as a result of customers calling to chase payment and media attention.
The FSA added that when customers telephoned LBG to enquire about the non-receipt of expected PPI redress payments, deficiencies in its process meant 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.
FSA director of enforcement and financial crime Tracey McDermott said: "The industry let customers down badly in relation to the sale of PPI. The significant volume of complaints is a product of LBG's own failings and the least customers can now expect is that redress, when it is due, will be paid promptly.
"In short, LBG's PPI redress payment systems fell well below the standard the FSA expects, and the size of this fine reflects how seriously we view these breaches. All regulated firms must treat those who complain fairly and that includes paying redress promptly when it is due.
"PPI is an area of continuing focus for the FSA and we continue to monitor how firms handle complaints and pay redress."
LBG agreed to settle with the FSA at an early stage of the investigation and therefore qualified for a 30% discount. Without the discount LBG would have been fined just over £6m.
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