Lloyds Banking Group has been hit with a record fine by the Financial Conduct Authority (FCA) for retail conduct failings - related to serious flaws in the controls over sales incentive schemes - of over £28m. But what went so wrong?
Advisers under pressure
Variable salaries, bonus thresholds and an advanced payment option that could lead to bonus deficits if sales targets were not met, all led advisers to hard sell products to keep - and importantly not lose - financial rewards.
Eyes on the prize
Advisers who met sales targets qualified for substantial salary rises and bonus payments, while advisers who did not faced salary reductions and demotions.
They were able to access details of their performance against sales targets on a daily basis. The FCA concluded that there was therefore a "significant risk" that, if not adequately controlled, advisers would sell products to customers that they did not need or want in an attempt to reach salary and bonus incentive thresholds.
Risk rating the client but not the advisers
Lloyds had various systems and controls in place to monitor the quality of sales made by advisers. However it failed to take steps to ensure that these controls were appropriately focused on the specific higher risk features of advisers' incentives.
Lloyds relied on routine business monitoring that assessed sales deemed higher risk based on customer profiles, product features and/or a random sample of adviser sales.
It failed to supplement this with appropriately risk-based monitoring that also focused on the risk profile of advisers.
Advisers were required to meet certain competency standards to be eligible for salary rises and bonuses. However the FCA found that this control was flawed as advisers could meet the required standards even where Lloyds had identified issues with their sales.
The FCA discovered that 71% of Lloyds TSB advisers, 32% of Halifax advisers and 39% of Bank of Scotland advisers received a monthly bonus on at least one occasion even though a high proportion of the sales reviewed had been found by the banks to be unsuitable or potentially unsuitable.
As a result of the low minimum numbers of files per adviser which were reviewed, this high proportion could result from only one file being found to be unsuitable or potentially unsuitable, the FCA said.
Who was watching the watchers?
Advisers were supervised by local sales managers, but Lloyds failed to identify that there was a potential conflict of interest due to the fact that sales managers' bonuses were based on the performance of advisers in their teams.
Lost in translation
Management information was not sufficient to enable management to identify any patterns in advisers' sales activities that may have warranted closer monitoring.
Get on board or get out
In 2010 and 2011, Lloyds introduced the right to make automatic demotions of those advisers who did not meet their sales targets over a nine month period. Advisers who were demoted had to stay on the lower pay tier for a minimum of nine months.
And the reasons for all this...
From 2010, Lloyds had a target for its combined retail bancassurance business to approximately double its customer base by 2015.
In seeking to meet this growth target Lloyds' strategy was to focus on sales of protection products over investment products.
Why protection? Because Lloyds wanted to increase the profitability of its bancassurance business, and protection products were more profitable.
Also Lloyds' analysis showed that there was a ‘protection gap' in the UK market and it wanted to meet the protection needs of customers.
In addition the financial crisis had resulted in a fall in customer demand for investment products, and Lloyds had reduced its appetite for the sale of investment products, which it saw as higher risk from a regulatory perspective, including anticipated regulatory developments.
A year of fines
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till