By Huw Jones
LONDON (Reuters) - Britain's financial watchdog imposed a record 28 million pound ($46 million) fine on Lloyds Banking Group for the way it encouraged staff to sell 2 billion pounds of products that customers did not need.
The probe covered the sale of products such as critical illness or income protection between January 2010 and March last year. During this time over a million products were sold to about 700,000 people.
Lloyds sales incentives included the chance to win a one-off payment of 1,000 pounds, known as a "grand in your hand". Another was called the "champagne bonus".
"The findings do not make pleasant reading," said Tracey McDermott, the Financial Conduct Authority's (FCA) director of enforcement.
The FCA was launched in April to try and end Britain's litany of mis-selling scandals in financial products spanning over two decades. The fine was the largest ever imposed on a bank for failings in how it sold products to retail customers.
The penalty was increased by 10 percent because the watchdog's predecessor, the Financial Services Authority, had already warned the bank about poorly managed incentive schemes over a number of years. Lloyds was also fined in 2003 for unsuitable sales of bonds.
"The incentive schemes led to a serious risk that sales staff were put under pressure to hit targets to get a bonus or avoid being demoted, rather than focus on what consumers may need or want," the watchdog said in a statement on Wednesday.
Lloyds had already set aside 8 billion pounds for mis-selling loan insurance and 400 million pounds for mis-sold interest rate swaps.
Lawyers said the level of the fine was a clear sign of how the FCA wanted to crack down on poor conduct. It comes at a time when the bank is trying to burnish its image and bolster capital levels for the sale of the government's remaining 33 percent stake in the lender, possibly to retail investors.
Lloyds said it accepted the findings and was already in touch with customers to address "potential impacts" that may have occurred due to past failings at its Lloyds TSB, Bank of Scotland and Halifax units.
"We are determined to ensure that any customer impacts are dealt with quickly and fully," Lloyds said in a statement, adding that it did not expect there to be any material financial consequences for the bank.
Lawyers said the fine was a "drop in the ocean" for a bank the size of Lloyds and the real cost was the disruption from having to review so many customer files at a time when the bank is in the middle of a turnaround ahead of full privatization.
Regulators published a review of incentive schemes last year which highlighted problems and said at the time one firm, now identified as Lloyds, had been referred to enforcement.
The FCA said Lloyds has made substantial changes to "right many of these wrongs".
Labor union Unite said the target driven sales culture at banks must be changed to better serve customers by giving staff a "fair day's pay" that is not linked to sales.
($1 = 0.6087 British pounds)
(Reporting by Huw Jones; editing by Tom Pfeiffer and Elaine Hardcastle)