FCA fines subsidiaries of Lloyds Banking Group Plc for unfair treatment of mortgage customers

Posted: 12/06/2020

Wholly owned subsidiaries of Lloyds Banking Group Plc, Lloyds Bank Plc, Bank of Scotland Plc and The Mortgage Business Plc (collectively referred to in this article as the banks) have all found themselves in the Financial Conduct Authority’s (FCA) firing line after its decision on Thursday (11 June 2020) to impose a financial penalty of £91,495,400, discounted to £64,046,800, for breach of the FCA Principles of Business. Substantial as it is on its own, this penalty is to be paid on top of the £300 million redress payments the banks are currently making to 526,000 of their customers for unfair treatment; all in all, accumulating the largest fine imposed on a UK high street bank seen in the past five years.

Principles breached

The FCA found that during the four-and-a-half-year period beginning April 2011 and ending December 2015, the banks had breached the following Principles when dealing with mortgage customers who were experiencing payment difficulties or were in mortgage arrears:

• Principle 3 – in accordance with which, a firm must take reasonable care to organise and control its affairs responsibly with adequate risk management systems; and
• Principle 6 – in accordance with which, a firm must pay due regard to its customers’ interests and ensure they are treated fairly.

In contravention of these Principles, the banks had put a large number of their customers at risk of being unfairly treated; in a sample taken during the investigation, unfair treatment was identified in roughly 38% of cases.

How these Principles were breached

During the period in which they breached the above Principles, Lloyds, Bank of Scotland and Mortgage Business did not have the systems in place to adequately gather sufficient information on the circumstances surrounding their customers’ mortgage arrears and/or financial difficulties.

The FCA decision notice stipulates this was exemplified in the following ways:

• the banks’ call handlers did not consistently obtain the information required in order to identify vulnerable customers and to “attempt to agree an appropriate course of action given the customer’s personal circumstances”;
• the banks’ call handlers were also deemed inexperienced in dealing with mortgage arrears, particularly in respect of unsecured arrears; and
• by way of exacerbating these pre-existing issues, the banks also used an inflexible method of setting out the minimum percentage of contractual monthly payments required, through a system known as the payment authority matrix, in which members of staff, such as a call handler, would be able to set such a percentage without seeking confirmation from a senior colleague.  

Lessons to be learnt

In delivering this decision, the FCA has illustrated how important it is for banks to both:

• have sufficient systems in place to identify the personal circumstances of, and thereby aid, customers in financial difficulty; and
• ensure that their employees are provided with proper training to prevent instances where there is a risk of unfairly treating customers and so that customers in mortgage arrears are treated fairly when making new payment arrangements.

Although the breaches by the banks were inadvertent and they have been supportive in all steps of the FCA investigation, the FCA’s message is clear: “firms should take notice of the action we have taken today to ensure that their own treatment of customers meets our expectations.”

Importantly, a bank’s duty to treat its customers fairly does not stop when a customer is in financial difficulty; rather, it is at this point in time when this duty becomes all the more significant. In balancing the business needs of the firm to recover the monies in default and the personal needs of the customer who is in default, an unfair trade-off can easily, and without malice, be drawn against the customer which can cause further financial strains and in some circumstances lead to the deprivation of housing. It is, therefore, important that banks actively take steps to prevent this from happening.

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