The FCA has fined three subsidiaries of Lloyds Banking Group, namely Lloyds Bank, Bank of Scotland and The Mortgage Business ("the Banks") £64 million, after a 30% settlement discount, for breaches of Principles 3 (management and control) and 6 (customers' interests) of the FCA Principles for Business. The FCA found that between 7 April 2011 and 21 December 2015 the Banks failed in their handling of mortgage customers who were in payment difficulties or arrears and, as a result, put a large number of customers (including those who were likely to be vulnerable) at risk of being treated unfairly.
During this four and a half year period, the Banks' systems and procedures for gathering information from mortgage customers in financial difficulties and/or arrears were inadequate to assess customers' financial circumstances, creating a very real risk that customers might enter into inappropriate or unsustainable arrangements which could result in worsening their financial position and, ultimately, in some cases the avoidable repossession of the customer's home. The FCA found that the failings were demonstrated in the following ways:
- Call handlers did not consistently obtain the information required in order to identify potentially vulnerable customers.
- The system in place (known as the payment authority matrix) to establish customer monthly repayments was inflexible and meant that call handlers may have failed to negotiate appropriate payment arrangements for customers.
- These risks were exacerbated as, due to personnel moves, nearly all of the mortgage arears call handlers were new to the role and lacked mortgage collections and recoveries experience. As a result, they were more likely to rely on the payment authority matrix to inform the arrangements they entered into, and less likely to undertake the required investigation of customer circumstances.
Some of the failings were identified by the Banks as early as 2011 but the steps the Banks took did not fully rectify the issues. In 2013, failings were also identified as part of an FCA thematic review and, despite action by the Banks to address those failings, a further review by the FCA in 2015 found that the Banks had failed to make sufficient progress, prompting the FCA to order a Skilled Person's Report.
The Banks did not dispute the FCA's findings, which meant they qualified for a 30% discount, but they contested the level of the fine in front of the RDC. Without the discount, the financial penalty would have been £91.4 million. In addition to the fine, the Banks entered into a redress scheme in 2017, with approximately £300 million to be paid to 526,000 customers who were deemed to have been treated unfairly.
The FCA has made it clear that, to avoid the serious failings and customer unfairness encountered here, firms must ensure that:
- Personnel working in collections and recoveries are suitably trained and monitored.
- Systems and procedures for gathering information on customers in financial difficulty are adequate and robust.
In one sense, there is learning in this decision as a further example of the FCA taking a hard line with banks to ensure the fair and appropriate treatment of customers. However, what is perhaps of more interest to enforcement watchers is the way that the penalty was dealt with.
The Banks did not contest the findings. Instead, they referred the level of the penalty to the RDC, taking advantage of the FCA's relatively new partly contested case process, and banking a 30% discount in the process. The focused resolution agreement procedure has led to a greater foregrounding of penalty issues than before (see for example the Upper Tribunal case of Linear LINK, see EW 28 "Tribunal's first decision in an FRA case"). And so it proved in this case. The Final Notice gives us a relatively full discussion of the arguments and findings in relation to the different steps that make up the penalty. Enforcement watchers will find this useful "jurisprudence". As for the Banks, they may have wished that they had left well alone. Whilst the RDC levied a penalty of some £64m following the hearing, the Warning Notice had instead suggested a mere £51m.