Lloyds TSB fined 1.9 million for unsuitable sales of high income bond

The fine relates to some sales of the Extra Income and Growth Plan (EIGP) in four tranches between October 2000 and July 2001. The EIGP was a new product with a medium/high risk rating designed by Scottish Widows Group. LTSB acquired Scottish Widows in March 2000 and the EIGP was distributed through the LTSB branch network. In total, some 51,000 policies were sold.

Andrew Procter, FSA Director of Enforcement, said:

"Firms must ensure that the products they recommend are suitable for an investor's individual circumstances and that any potentially unsuitable sales are identified. The procedure and controls to achieve this need to be especially rigorous where medium or high risk products are being offered to inexperienced investors."

LTSB did not have in place sufficiently rigorous procedures and controls for considering all of the issues surrounding the selling of the EIGP. It did not emphasise sufficiently to the LTSB branch network's financial consultants the need for investors, when buying the EIGP, to have appropriately balanced portfolios and the need for investors to retain sufficient liquid resources. (Together, these two factors are described as concentration levels.)

In particular:

• there was not sufficiently bespoke guidance on acceptable concentration levels in LTSBs suitability rules in relation to the EIGP;

• there was not sufficiently specific training of LTSB branch network financial consultants in terms of the suitability of the EIGP for investors on grounds of concentration levels; and

• in the absence of such guidance, LTSB's sales verification process did not identify potential unsuitable sales through the LTSB branch network on grounds of concentration levels.

Additionally, LTSB did not ensure an adequate balance between the general pressures of its sales targets and the suitability of EIGP for investors and failed to analyse the reasons for the high level of sales through the LTSB branch network of Tranche 1 of the EIGP

As a result, some 22,500 EIGP sales - 44% of the total number of policies sold - were made through the LTSB branch network to investors when it was an unsuitable product for them. In the light of these failings specifically, LTSB has agreed to pay compensation in respect of:

• approximately 16,500 sales to investors who had not, before their purchase of the EIGP, purchased an equity related investment product and who purchased the EIGP with more than 20% of their financial assets; and

• approximately 6,000 sales to other investors who had, before their purchase of the EIGP, purchased one or more other equity related investment products and who purchased the EIGP with more than 35% of their financial assets.

In relation to the EIGP, LTSB failed in the above respects to act with due skill, care and diligence and to have adequate arrangements to ensure that its financial consultants were adequately trained with regard to concentration levels and that it had sufficiently well defined compliance procedures. In so doing, LTSB demonstrated failings that are viewed by the FSA as particularly serious in the light of the following factors:

• The failure to ensure that adequate procedures and controls were put in place to sell the EIGP throughout the LTSB branch network occurred even though LTSB had clearly identified, in advance, the potential risks of mis-selling the EIGP and had put in place a number of measures intended to mitigate those risks;

• LTSBs failure resulted in the EIGP being mis-sold to a large number of inexperienced investors, exposing them to the risk of substantial loss;

• Specifically, the failings in respect of certain EIGP sales meant that approximately 84% of the total sales to customers who had no previous experience of equity related investment products resulted in their having more than 20% of their total financial assets invested in the EIGP. Approximately 18% of the total sales to customers who did have previous experience of equity related investment products resulted in their having more than 35% of their total financial assets in the EIGP.

In deciding the level of penalty to be imposed, the FSA has taken into account that, while the bank's failings in this case were serious, LTSB has co-operated fully since the identification of these issues by the FSA in October 2001. It has conducted a comprehensive investigation into its sales of the EIGP and has agreed to pay the compensation as set out above. LTSBs conduct was not deliberate or reckless and the bank has put in place remedial steps to address the issues in relation to the EIGP referred to above. Were it not for the remedial action taken and for the co-operation demonstrated, resulting in the early settlement of the matter, the financial penalty would have been significantly higher.

LTSB will be contacting customers to advise them of how today's announcement will affect them. The bank has also established a consumer information line to answer any immediate questions that its investors have. The number is: 0800 328 4761.

Notes for editors

1. The Final Notice, which contains the background to the action, is published on the FSA website at: http://www.fsa.gov.uk.

2. The relevant statutory provisions and regulatory rules applied in this case are as follows:

   Section 206 of the Act provides:
   If the Authority considers that an authorised person has contravened a requirement imposed on him by or under this Act, it may impose on him a penalty, in respect of the contravention, of such amount as it considers appropriate.

   The Financial Services and Markets Act 2000 (Transitional Provisions and Savings)(Civil Remedies, Discipline, Criminal Offences etc)(No 2) Order 2001 provides, at Article 8(2), that the power conferred by Section 206 of the Act can be exercised by the FSA in respect of failures by a firm to comply with any of the provisions specified in Rule 1.3.1(6) of the Rules of the Personal Investment Authority ("PIA") as if the firm had contravened a requirement imposed by the Act.

   PIA Rule 1.3.1(6) provided that a PIA Member which failed to comply with the PIA Rules or any of the Principles was liable to disciplinary action.

   PIA Rule 1.3.1(2) provided that a PIA Member had to obey the Rules of the PIA, which included the SIB Adopted Rules and SIB Principles.

   The SIB Principles are universal statements of the standards expected by firms that were issued by the SIB and applied to PIA Members.

   SIB Adopted Rule S5.01 provides:
   A Member shall not make a recommendation to a personto purchase, sell or exchange any investmentunless it has reasonable grounds for believing that the transaction is suitable for that person having regard to the facts known, or which ought reasonably to be known, to the Member, about that investmentand as to that persons other investments and his personal and financial situation

   Principle 2 of the SIB Principles (Principle 2) provides:
   A firm should act with due care, skill and diligence.

   Principle 9 of the SIB Principles (Principle 9) provides:
   A firm should organise and control its internal affairs in a responsible mannerand where the firm employs staffshould have adequate arrangements to ensure that they are suitable, adequately trained and properly supervised and that it has well-defined compliance procedures.

   LTSB would therefore have been liable to disciplinary action under PIA Rule 1.3.1(6). Accordingly, the FSA may impose a financial penalty on LTSB pursuant to Section 206 of the Act.

3. The concentration levels referred to above are specific to this case and should not be taken as indicating "FSA-approved" concentration levels. The FSA does not set generic guidelines for individual portfolio levels or allocations. In addition these levels should not be taken as a guideline by the FSA in respect of the issue of suitability of products for investors.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.