FINAL NOTICE

To:
Lloyds TSB Bank Plc, Lloyds TSB Scotland Plc and Bank of Scotland plc
(together Lloyds Banking Group, “LBG”)

FSA
Reference
Numbers:
119278, 191240 and 169628

1.
ACTION

1.1.
For the reasons given in this notice, the FSA hereby imposes on LBG a financial
penalty of £4,315,000.

1.2.
LBG agreed to settle at an early stage of the FSA’s investigation. It therefore qualified
for a 30% (Stage 1) discount under the FSA’s executive settlement procedures. Were
it not for this discount, the FSA would have imposed a financial penalty of
£6,164,327 on LBG.

2. SUMMARY OF REASONS

2.1.
The penalty relates to LBG’s failure to pay redress promptly to PPI complainants
between 5 May 2011 and 9 March 2012 (the “Relevant Period”).

2.2.
During the Relevant Period, LBG sent 582,206 decision letters to PPI complainants,
agreeing to pay redress to them. In order to comply with its regulatory obligation to
pay redress promptly, LBG aimed to make payment within 28 days of these decision
letters. However, LBG failed to do so in up to 140,209 (24%) cases. 24,589 (4%)

cases inadvertently dropped out of LBG’s PPI redress payments process, and
remedial action had to be taken subsequently to ensure those payments were made.
These payments were identified as a result of customers telephoning LBG to chase
payments and media attention. Following this, LBG carried out an investigation.

2.3.
LBG breached the FSA’s Principles and rules by failing to:

1) take reasonable care to organise and control its affairs responsibly and effectively,

with adequate risk management systems (Principle 3); and

2) comply promptly with offers of redress which LBG had made and which had been

accepted by PPI complainants (DISP 1.4.1R(5)).

2.4.
In particular:

1) LBG failed to establish an adequate process for preparing redress payments to

send to PPI complainants. In addition to a lack of initial planning by LBG, LBG’s
staff engaged on the redress process did not have the collective knowledge and
experience to ensure that the process worked properly;

2) As a result, there were a number of serious deficiencies in LBG’s PPI payment

preparation framework. These deficiencies related to the way LBG processed data
relating to customers’ PPI redress payments before this data was sent to the
separate payments area. LBG’s system was heavily reliant on manual processes
and data transfers which could not cope with high volumes of PPI payments of
varying complexity. There was ineffective tracking of cases through the process
and a lack of co-ordination between multiple redress sites. Customers’ payment
details were subjected to poor data governance and there was a lack of controls,
including no control at all for the reconciliation of PPI payments. In addition,
parts of the process were under resourced;

3) LBG failed to monitor effectively whether it was making all payments of PPI

redress promptly. Nor did it gather sufficient management information to enable
it to identify, in a timely manner, the full nature and extent of the payment
failings; and

4) LBG’s risk governance framework in respect of its process for preparing redress

payments to send to PPI complainants was ineffective. An effective risk function
would have assisted LBG to identify and address, in a timely way, the systems and
controls deficiencies in its process.

2.5.
As a result of these failings, up to 140,209 (24%) customers whose complaints were
upheld in full or in part were not paid redress within 28 days of LBG’s decision letters
to customers. Approximately 87,000 (15%) of these customers had to wait over 45
days, 56,000 (9.7%) over 60 days, 29,000 (5%) over 90 days and some 8,800 (1%)
over 6 months (these have subsequently been paid, other than where they involve
exceptional customer circumstances and are still being addressed). Although LBG
has taken steps to ensure that these customers have not been financially disadvantaged
by the delays by paying interest at 8% per annum on the outstanding redress figure
where appropriate, the average redress due to each customer was £2,733 and
customers were inconvenienced by the delay. When customers telephoned LBG to

enquire about the non-receipt of the payments they had been expecting, the
deficiencies in its processes meant that LBG was unable to fast-track the payment to
the customer, inform them when payment would be made, or explain why it had been
delayed.

2.6.
LBG has since completed a comprehensive reconciliation of its PPI redress payments
to ensure that all customers due PPI redress have been correctly paid and
compensated for any delay in receiving their payment. Once the deficiencies in its
process had been identified, LBG quickly conducted the reconciliation review and
improved its processes to address the failings identified in this notice, including the
rapid implementation of a PPI payment validation tool intended to ensure that any
future issues regarding delayed payments are immediately identified and corrected.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice:

“the Act” means the Financial Services and Markets Act 2000;

“BBA” means the British Bankers’ Association;

“Bank of Scotland” means BOS’s Bank of Scotland brand;

“BOS” means Bank of Scotland plc;

“DEPP” means the FSA’s Decision Procedure & Penalties Manual as set out in the
FSA Handbook;

“DISP” means the Dispute Resolution: Complaints Sourcebook which is part of the
FSA Handbook;

“the FSA” means the Financial Services Authority;

“HBOS” means HBOS plc;

“Halifax” means the BOS’s Halifax brand;

“the Judicial Review” means the Judicial Review proceedings challenging the FSA’s
decision to introduce measures set out in PS 10/12;

“LBG” means, together, Lloyds TSB Bank Plc, Lloyds TSB Scotland Plc and Bank of
Scotland plc;

“LTSB” means Lloyds TSB Bank Plc and Lloyds TSB Scotland Plc;

“PPI” means payment protection insurance;

“the Principles” means the FSA’s Principles for Businesses as set out in the FSA
Handbook;

“PS 10/12” means “Policy Statement 10/12, The assessment and redress of Payment
Protection Insurance complaints; feedback on the further consultation in CP10/6 and
final Handbook text”; and

“the Relevant Period” means the period between 5 May 2011 and 9 March 2012.

4.
FACTS AND MATTERS

4.1.
LTSB and BOS are wholly owned subsidiaries of Lloyds Banking Group plc, which
was formed following the acquisition of HBOS by Lloyds TSB Bank Plc in January
2009. They provide a wide range of banking and financial services and have been
authorised by the FSA since 1 December 2001. BOS operates the Bank of Scotland
and Halifax brands in the UK.

Payment protection insurance (PPI)

4.2.
PPI is an insurance product which has often been sold to customers in connection with
personal loans, credit cards, mortgages or other forms of debt. It is designed to help
meet repayments in certain circumstances where the customer is unable to make
repayments, such as in the event of an accident, sickness or unemployment and may
also include life cover. The insurance can be offered in return for a single up front
premium or regular monthly premiums for the duration of the cover. It can be sold on
an advised or execution only basis.

4.3.
LBG sold very significant volumes of PPI policies to customers, which represented a
significant source of revenue for the group. LBG stopped selling single premium PPI
in January 2009. In July 2010 LBG also ceased writing new regular premium PPI
business.

4.4.
There have been widespread and serious failings in relation to the sale of PPI across
the financial services industry and very high numbers of complaints about PPI in
recent years.

4.5.
LBG has also received, and handled, a very high and unprecedented volume of PPI
complaints. In 2011 LBG made a provision of £3.2 billion (which it has since
increased to £5.3 billion as of autumn 2012) in respect of the cost of PPI mis-selling.
By the end of September 2012, LBG had incurred total costs of £3.7 billion in respect
of compensating mis-sold PPI customers.

4.6.
The average amount of redress paid by LBG in respect of each PPI complaint it
received during the Relevant Period was £2,733. In many cases LBG paid interest on
the redress payments from the date of the sales failing to the date of payment at 8%
per annum, where the redress payment took the form of a cash payment from LBG to
the customer. In other cases, such as when a customer had an outstanding loan with
LBG in relation to a PPI policy which had been mis-sold, the loan was restructured to
take account of the redress owed by LBG to the customer with effect from the date of
sale of the PPI. Following the Judicial Review referred to below, it made many
payments of redress to PPI complainants on an ex gratia basis to help deal with the
backlog of complaints.

The judicial review of PS10/12

4.7.
On 8 October 2010 LBG and the other main UK banks, through the BBA,
commenced judicial review proceedings in relation to the FSA’s decision to introduce
a package of measures outlined in the FSA’s Policy Statement PS10/12 (“the Judicial
Review”). These measures were intended by the FSA to ensure that firms handled
PPI complaints more fairly and consistently and delivered fairer outcomes to
customers who had been mis-sold PPI, but had not complained. Pending the outcome
of the Judicial Review, in common with other firms and with the FSA’s consent, LBG
put on hold its assessment of approximately 135,000 PPI complaints which were
affected by the issues considered by the Judicial Review.

4.8.
On 20 April 2011 the High Court ruled in favour of the FSA and upheld PS 10/12 in
all respects.

4.9.
On 5 May 2011 LBG announced that it would accept the Court’s decision and would
not be participating in any appeal that the BBA might seek to bring. The BBA
subsequently confirmed that it would not seek to appeal the decision that the FSA’s
measures should be upheld in full, bringing the Judicial Review to an end.

4.10. LBG had undertaken limited contingency planning in relation to future PPI

complaints handling pending the outcome of the Judicial Review, since it had
expected to appeal any unfavourable decision. When it took a different approach and
decided not to appeal, it was then obliged to process rapidly its backlog of
approximately 135,000 PPI complaints as well as handle new PPI complaints.

LBG’s redress payment sites

4.11. During the Relevant Period, LTSB used one main site to prepare customer payment

data for redress due in respect of PPI policies it had sold with LTSB products. Other
smaller sites were also used.

4.12. Halifax and Bank of Scotland did not have dedicated sites for preparing customer

payment data. Four different sites were used for processing PPI redress due in respect
of PPI policies sold with their products.

Failings

1) Failure to establish an adequate redress payments process

4.13. LBG failed to undertake effective planning activity at the outset to ensure it

established a robust redress process that was able to process promptly a significant
number of PPI redress payments, some of which were complex in nature.

4.14. LBG adapted an existing PPI procedure to enable it to prepare PPI redress payments

following the Judicial Review.

4.15. LBG assumed that because its PPI redress processes had been adapted from an

existing PPI procedure, there was a low risk that they would fail to operate as
intended. However, this was not an appropriate assumption to make because the
existing PPI procedure was not designed to process large volumes of complex PPI
redress payment cases on an ongoing basis.

4.16. The end to end PPI payment preparation process was complex and not fully

understood by the staff involved, who did not have the collective knowledge and
experience required to establish and manage operational processes of this scale and
complexity. They included variable manual data transfers across multiple sites, which
were determined by platform, brand and product. Despite this, LBG did not have
documented process maps in place throughout 2011.

4.17. Following the Judicial Review, LBG did not adequately assess the capacity restraints

of its new PPI payment preparation process. Only limited scenario planning and
stress testing had taken place and this failed to highlight whether the process could
cope with forecasted numbers of PPI redress payments. In the event, LBG did not
establish a process which was capable of handling payments of such volumes of PPI
payments which materialised, leading to delayed redress payments and some
payments inadvertently dropping out of the dedicated process until they were
remedied some time later.

2) Deficiencies in LBG’s operational framework for making PPI redress
payments

4.18. As a result of LBG’s failure to plan effectively and establish a robust process for

preparing PPI redress payments at the outset, there were a number of deficiencies in
LBG’s PPI redress framework as set out below.

Reliance on manual processes in respect of which there were insufficient controls

4.19. LBG’s process for preparing PPI redress payments relied heavily on customer

payment information being accurately transferred manually from one area of LBG’s
process to another, including through the use of Excel spreadsheets containing
customer payment data. There were multiple redress sites and contractors were used
to perform some of the work, which increased the number of manual data transfers
between different parts of the process. These data transfers were only subject to
limited checks which meant that there was a risk that errors would go undetected.
Until LBG subsequently recognised the deficiencies in January 2012 and took
remedial action to address them, payments did not always progress through the
process as intended.

4.20. Other aspects of LBG’s PPI payment preparation process were also manual in nature

and gave rise to a risk of payment problems occurring which would not be mitigated
by the existence of appropriate controls. For example:

1) Numerous Excel spreadsheets containing customer payment data were subject to

copy and paste errors. One particularly serious copy and paste error occurred in
September 2011 which resulted in a considerable number of PPI complainants
being paid the wrong amounts of redress. Remedial action had to be taken to
ensure customers ultimately received the correct payments;

2) A manual ticketing process was used to manage the work flow through the main

LTSB site. This process relied on paper tickets being moved between
whiteboards. Tickets were at risk of being lost or moved incorrectly. Other paper
based systems were also used at a HBOS site which gave rise to an unacceptable
risk of documentation being lost or misplaced;

7


3) At the main LTSB site, staff inadvertently failed to process all of the payments set

out on spreadsheets or processed batches of payments twice; and

4) At a HBOS site there were instances of cheques being stored inappropriately and

there were inadequate controls in place for showing a clear audit trail should a
cheque go missing.

4.21. At sites where lower volumes of payments were processed, reliance was placed upon

informal communications to facilitate the progression of payment cases through the
process. However, these informal communications were insufficiently structured and
proved ineffective as the volume of redress payments to be made increased.

Ineffective tracking of work-flow

4.22. A significant failing was LBG’s inability to track redress payments through the

process. LBG was therefore unable to detect whether payments had not progressed
through the process as intended, or identify without manual intervention which
payments had not been made. This made timely remedial action impossible.

4.23. PPI redress payments were not logged as they entered the PPI payment preparation

process and some payments entered the process having missed the new submissions
process altogether. Batches of cases were not sequentially numbered and there was
ineffective work flow tracking through pre-payments activities. Proper records were
not used to confirm that batches were allocated to the appropriate areas.

4.24. At the main LTSB site data was received from three redress sites and broken down

into smaller batches of up to 60 payment cases for manual processing. Batches saved
onto a shared computer drive were not reconciled to ensure work on all redress
payments was completed.

Lack of co-ordination between payment sites

4.25. There was poor communication between various Halifax and Bank of Scotland

redress payment sites and an overall lack of coordination. These redress sites were
often working in isolation.

4.26. When issues were identified which affected more than one site, lessons learned and

best practice were not shared with other sites despite similarities in how these redress
sites operated and the obvious benefits of sharing this information.

Poor data governance

4.27. At the main LTSB site the process for preparing PPI redress payments was managed

through unprotected spreadsheets to which all processing staff had access. There
were numerous points in the process at which spreadsheets and documents containing
payment information could have been amended inadvertently.

Lack of quality controls

4.28. There were insufficient quality controls in place across LBG’s entire process for

preparing PPI redress payments to send to customers. Through its own investigations
LBG’s audit department identified in a report dated March 2012 that the degree of

control over the LTSB Cards and Loans PPI payment preparation process was
inadequate between May 2011 and January 2012. Appropriate controls would have
enabled LBG to identify promptly under or over payments of redress, or duplicate
payments, all of which were subsequently uncovered when LBG took remedial action.

4.29. Particularly significant examples of control failings include:

1) in autumn 2011 6,178 LTSB loans were not restructured as required in order to

take into account the redress due to PPI complainants. A historical control failure
meant that these loans were not included in the restructure information passed
from the PPI complaint teams to the centre responsible for carrying out the
restructuring; and

2) at the main LTSB site there were no checks performed in relation to the accuracy

of batches of redress payments processed through payment preparation stages.

Inadequate resourcing

4.30. Parts of LBG’s PPI redress process were under resourced and capacity constraints

were exceeded. As a result, backlogs of payments occurred and this in turn impacted
adversely upon LBG’s ability to make timely payments of redress to other
complainants.

4.31. In addition, there were no formal training plans or competency schemes in place in a

number of LBG’s PPI redress sites, including at LTSB’s largest site. At another
LTSB site, training and competency schemes were only communicated to staff orally
and there were indications that staff were not complying with the training. At a
HBOS site, it was identified that some temporary contractors had not completed core
training requirements and were unaware of their responsibilities.

4.32. Where external contractors were used by LBG to perform work in connection with its

PPI payment preparations, the precise nature and the standard of the work required to
be completed by those contractors was not adequately outlined within existing
contractual documentation. Nor was the quality of the work performed by contractors
robustly measured through the use of appropriate metrics. Inadequate oversight of
contractors also allowed poor performance on occasion to pass unchecked.

3) Failure to monitor the PPI redress payments operation appropriately

4.33. LBG did not have adequate management information available to indicate whether it

was making payments of redress to PPI complainants promptly, or whether those
payments were accurate. Initially, LBG did not know how many payments were
being processed at each of its PPI redress sites. LBG’s management could not readily
ascertain when backlogs of payments had developed in parts of the process which
needed to be addressed. They were accordingly unaware of the underlying problems
that were developing and unable to take prompt and effective action to address them.

4.34. Through its own subsequent investigation work, LBG identified that additional

monitoring, data validation and reporting was required for LTSB Cards and Loans to
prevent dropped batches or identify bottlenecks in the process.

4.35. As mentioned in paragraph 4.20(1) above, the first indication of a problem occurred

in September 2011 due to a copy and paste error in a payment spreadsheet. Postings
on customer forums, media coverage, and a significant rise in calls from customers
chasing payments flagged the payment problems in autumn 2011. LBG’s
management, through customer call listening, identified that a significant proportion
of calls were from customers chasing expected redress payments. Initially, LBG was
unable to handle the unexpected increase in call volumes and many attempted
telephone calls to LBG were abandoned by customers before they were answered.

4.36. When at the same time the FSA raised queries with LBG relating to its PPI redress

payments, LBG did not have sufficient information to be able to confirm to the FSA
that all redress payments had been processed and accurate payments made.

4.37. In the absence of meaningful management information, LBG sought to rectify issues

on an ad hoc basis. For example, in October 2011, LBG identified 42,000 cases
where it had failed to make payments to customers. LBG’s management believed that
this was an isolated issue and did not fully investigate it. As a result LBG failed to
identify and correct the root causes of the problems at an early juncture. Reviews
conducted of payments agreed to be made in September 2011, December 2011 and
January 2012 highlighted the need for a full investigation. Further investigation
subsequently took place and revealed that the 42,000 payments referred to above were
delayed due to a backlog in LBG’s payment preparation process.

4.38. In the meantime LBG was unable to give customers an adequate response when they

called to query a late or missing payment. The deficiencies in LBG’s systems left
staff unable to provide customers who chased payments with a definitive timescale for
when their redress payment would be made or an explanation for the cause of the
delay. Initially, there was no way in which missed or merely late payments could be
identified and swift payment made.

4.39. The issue of missing or delayed payments was first flagged to a senior management

committee in November 2011 when it was reported that the 42,000 cases had not at
that point been paid. Further PPI payment problems were reported to management in
late November 2011 when it was discovered that no payment record had been created
for 32,000 cases.

4.40. In January 2012 a batch of 18,814 payments (comprising a portion of the 24,589

referred to at paragraph 2.1 above) was identified as having dropped out of the
payments process following telephone calls from affected customers querying why
they had not received payment.

4) Inadequate risk governance

4.41. Until November 2011, LBG failed to have an effective risk governance framework in

place in respect of its processes for preparing PPI redress payments to send to
customers. An effective risk framework would have enabled LBG to identify and
assess the key operational risks associated with its PPI payments systems and controls
and to remediate the deficiencies.

4.42. Prior to November 2011 LBG’s various risk committees failed to address LBG’s PPI

redress payments processes. Whilst some very limited risk monitoring did take place

at certain redress sites, at other sites no formal record was kept of discussions about
performance and operational challenges. It is accordingly unclear what action, if any,
was taken to address issues as they were identified.

4.43. A limited risk review was conducted in September 2011. This review recognised that

there was no robust risk management framework in place at that time. It also
identified a number of deficiencies in LBG’s PPI payment preparation processes.
However, the specific nature and seriousness of the issues affecting these processes
were not sufficiently highlighted in the review.

4.44. A more detailed risk review took place in November 2011. It flagged a number of

risk and control gaps and noted that various ongoing initiatives would assist LBG to
address these, such as some risk workshops which had taken place. However, the
review reinforced the conclusions made in the September 2011 review that LBG
needed a much more formal approach to operational risk governance and risk
management. It identified the need for the establishment of an integrated risk
governance framework, development of proper risk profiles, formal control test plans
to be put in place and for risk event management when risks materialised. These
initiatives were progressively implemented throughout 2012, including through the
establishment of additional risk forums.

Full reconciliation review

4.45. LBG commenced a full reconciliation of PPI redress payments on 9 March 2012. The

results of the reconciliation and other investigatory work subsequently conducted by
LBG show that during the Relevant Period:

1) LBG sent 582,206 letters to PPI complainants agreeing to pay redress to them;

2) LBG failed to pay redress within 28 days of its decision letters to customers in up

to 140,209 (24%) cases. Approximately 85% of payments were made within 45
days, 90% within 60 days, 95% were made within 90 days and 99% were made
within 6 months. All payments outstanding at 6 months have been paid other than
where they involve exceptional customer circumstances and are still being
addressed;

3) 24,589 (4%) cases inadvertently dropped out of LBG’s PPI redress payments

process and remedial action had to be taken to ensure the payments were made;
and

4) The majority of the interest payments LBG made to customers (at the rate of 8%

per annum) on account of delayed redress were of £5 or under in value. LBG paid
a total amount of £1,867,978 in interest to delayed complainants, with an average
value of these interest payments of £13.32 per affected customer.

5.
FAILINGS

5.1.
Annex A sets out extracts from statutory and regulatory provisions relevant to this
Notice.

5.2.
During the Relevant Period LBG breached Principle 3 because, in respect of its PPI
redress processes, it failed to take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems. Specifically, on
the basis of the facts and matters set out in paragraphs 4.1 to 4.45 (inclusive) above,
LBG failed to:

1) adequately plan for, establish and maintain an effective process for preparing

redress payments to send to PPI complainants, which would ensure such payments
were made promptly and accurately;

2) undertake effective monitoring and management oversight of its redress process;

and

3) until approximately November 2011, have an effective risk governance

framework in place.

5.3.
LBG also breached DISP 1.4.1R(5) by failing to make PPI redress payments promptly
to PPI complainants to whom it had agreed to pay redress.

6.
SANCTION

6.1.
The FSA’s policy on the imposition of financial penalties and public censures is set
out in the FSA’s Decision Procedure and Penalties Manual (DEPP) and the
Enforcement Guide. In determining the appropriate outcome in this case, the FSA has
had regard to this guidance. The FSA considers that the seriousness of this matter
merits the imposition of a financial penalty.

6.2.
DEPP 6.1.2G provides that the principal purpose of a financial penalty is to promote
high standards of regulatory conduct. It seeks to do this by deterring firms who have
breached regulatory requirements from committing further contraventions, helping to
deter other firms from committing contraventions and demonstrating generally to
firms the benefit of compliant behaviour.

6.3.
The FSA introduced a new policy for imposing a financial penalty in March 2010,
which requires the FSA to apply a five-step framework to determine the appropriate
level of financial penalty. This policy is set out in Chapter 6 of DEPP. As the
Relevant Period is 5 May 2011 to 9 March 2012, the FSA has applied the new policy
to calculate the appropriate penalty for LBG’s breach.

Step 1: disgorgement

6.4.
Pursuant to DEPP 6.5A.1G, at Step 1 the FSA seeks to deprive a firm of the financial
benefit derived directly from the breach where it is practicable to quantify this.

6.5.
The FSA has not identified any financial benefit that LBG derived directly from its
breach.

6.6.
Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.7.
Pursuant to DEPP 6.5A.2G, at Step 2 the FSA determines a figure that reflects the
seriousness of the breach. Where the amount of revenue generated by a firm from a
particular product line or business area is indicative of the harm or potential harm that
its breach may cause, that figure will be based on a percentage of the firm’s revenue
from the relevant products or business area.

6.8.
The FSA considers that the revenue generated by LBG is not an appropriate indicator
of the harm or potential harm caused by its breach in this case. The FSA considers
that a figure based on the relevant interest paid by LBG to affected customers is an
appropriate indicator of the harm or potential harm caused by its breach in this case.
LBG’s relevant interest is the total interest paid or due to be paid by LBG to
complainants in respect of delayed PPI redress payments during the Relevant Period.
The FSA has used the figure provided by LBG as the basis of relevant interest for this
period which is £1,867,978.

6.9.
Having determined the relevant interest, the FSA has considered the seriousness of
LBG’s breach by taking into account those factors which are relevant to an
assessment of the level of seriousness of the breach.

6.10. The factors the FSA has taken into account in assessing the seriousness level reflect

the impact and nature of the breach, and whether it was committed deliberately or
recklessly. The FSA assesses the level of seriousness on a sliding scale between level
1 and 5, with level 5 representing the most serious breaches and level 1 representing
the least serious. DEPP 6.5A.2(11) lists factors likely to be considered “level 4 or 5
factors”. The FSA does not consider that any of these factors apply.

6.11. DEPP 6.5A.2(12) lists factors likely to be considered “level 1, 2 or 3 factors”. Of

these, the FSA considers the following factors to be relevant:

1)
LBG did not make any profit or avoid any loss directly as a result of the
breach;

2)
No significant loss was caused to customers as a whole. In particular:

(a)
LBG has confirmed that interest has been paid at the rate of 8% per
annum on delayed redress payments (totalling £1,867,978). The
majority of interest payments were £5 or under in value and £13.32
was paid to each affected customer on average. Approximately 85% of
customers were paid within 45 days, 90% within 60 days, 95% within
90 days and 99% within 6 months. All payments outstanding at 6
months have subsequently been paid other than where they involve
exceptional customer circumstances and are still being addressed;

(b)
The FSA considers that the risk of the 24,589 payments which
inadvertently dropped out of LBG’s PPI redress payments process
being permanently missed by LBG was low. Although LBG’s systems
did not proactively identify the issues with these payments, LBG had
notified customers of its offers of redress in writing in response to their
complaints about PPI. Customers were expecting to receive redress

payments and, when they did not, they chased LBG for them. Multiple
calls from customers prompted LBG to investigate these payments.
On 9 March 2012, LBG commenced a full reconciliation of all PPI
redress payments. In such circumstances it is unlikely that any
appreciable number of payments would have ultimately gone unpaid or
unnoticed;

3) Although the breach was widespread across the redress part of LBG’s PPI

complaints operation, there is no evidence that the breach indicates a widespread
problem or weakness in other parts of LBG’s business which do not involve PPI
complaints handling; and

4) The FSA has not found that the breach was committed deliberately.

6.12. DEPP 6.5A.2(6) lists non-exhaustive factors relating to the impact of the breach and

DEPP 6.5A.2(7) lists non-exhaustive factors relating to the nature of the breach.
Under the circumstances of this case, the FSA considers that the inconvenience and
distress caused to a significant number of customers (up to 140,209) on account of
LBG’s delayed PPI redress payments is a factor relevant to the impact and nature of
the breach.

6.13. The FSA also considers that the following factors are relevant:

1) LBG’s breach did not, and did not have the potential to, impact upon LBG’s

decisions to uphold or reject complaints;

2) The fact that 24,589 payments inadvertently dropped out of LBG’s PPI redress

payment process means that the breaches are more serious than those in cases
involving delayed payments alone;

3) The known and expected volume of PPI complaints and seriousness of the PPI

issues meant that LBG should have planned and tested its PPI payments systems
better and more carefully monitored results to check for any potential deficiencies,
especially in circumstances where it was aware that it had had to put in place its
new payment process quickly following the Judicial Review.

6.14. Taking all these factors into account, the FSA considers the seriousness of the breach

to be level 2.

6.15. For the purposes of this case the FSA has applied the following multiples to the

seriousness factors considered at DEPP 6.5A.2(3):

1) level 1 – 0

2) level 2 – x 3

3) level 3 – x 6

4) level 4 – x 9

5) level 5 – x 12

6.16. The penalty calculation, having taken into account the factors above is 3 x

£1,867,978.

6.17. Step 2 is therefore £5,603,934.

Step 3: mitigating and aggravating factors

6.18. Pursuant to DEPP 6.5A.3G, at Step 3 the FSA may increase or decrease the amount of

the financial penalty arrived at after Step 2, but not including any amount to be
disgorged as set out in Step 1, to take into account factors which aggravate or mitigate
the breach.

6.19. The FSA considers that LBG’s previous disciplinary record and general compliance

history aggravate the breach. In particular:

1) in September 2003, the FSA fined Lloyds TSB Bank Plc £1.9 million for its

conduct in selling high income bonds;

2) Bank of Scotland plc has recently been the subject of disciplinary action by the

FSA on a number of occasions. In particular, in:

(i)
May 2011, the FSA fined the firm £3.5 million in relation to its handling
of complaints relating to retail investments;

(ii)
March 2012, the FSA imposed a public censure on the firm in relation to
the management and control of its corporate lending; and

(iii)
October 2012, the FSA fined the firm £4.2 million in relation to incorrect
mortgage terms and conditions that it gave to standard variable rate
customers; and

3) Lloyds Banking Group plc made a provision in its accounts of £5.3 billion in

respect of compensating mis-sold PPI customers.

6.20. Having taken into account these aggravating factors, the FSA considers that the Step 2

figure should be increased by 10%.

6.21. Step 3 is therefore £6,164,327.

Step 4: adjustment for deterrence

6.22. Pursuant to DEPP 6.5A.4G, if the FSA considers the figure arrived at after Step 3 is

insufficient to deter the firm who committed the breach, or others, from committing
further or similar breaches, then the FSA may increase the penalty.

6.23. The FSA considers that the Step 3 figure of £6,164,327 represents a sufficient

deterrent to LBG and others, and so has not increased the penalty at Step 4.

6.24. Step 4 is therefore £6,164,327.

Step 5: settlement discount

6.25. Pursuant to DEPP 6.5A.5G, if the FSA and the firm on whom a penalty is to be

imposed agree the amount of the financial penalty and other terms, DEPP 6.7
provides that the amount of the financial penalty which might otherwise have been
payable will be reduced to reflect the stage at which the FSA and the firm reached
agreement. The settlement discount does not apply to the disgorgement of any benefit
calculated at Step 1.

6.26. The FSA and LBG reached agreement at Stage 1 and so a 30% discount applies to the

Step 4 figure.

6.27. Step 5 is therefore £4,315,029, which we have rounded to £4,315,000.

Proposed penalty

6.28. The FSA therefore proposes to impose a financial penalty of £4,315,000 on LBG for

breaching Principle 3 and DISP 1.4.1R(5).

7.
PROCEDURAL MATTERS

Decision makers

7.1.
The decision which gave rise to the obligation to give this Final Notice was made by
the Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner of and time for payment

7.3.
The final penalty must be paid in full by LBG to the FSA by no later than 14 days
from the date of this Final Notice.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding after 14 days from the date of this
Final Notice, the FSA may recover the outstanding amount as a debt owed by LBG
and due to the FSA.

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information
about the matter to which this Notice relates. Under those provisions, the FSA must
publish such information about the matter to which this Notice relates as the FSA
considers appropriate. The information may be published in such manner as the FSA
considers appropriate. However, the FSA may not publish information if such
publication would, in the opinion of the FSA, be unfair to LBG or prejudicial to the
interests of consumers.

7.6.
The FSA intends to publish such information about the matter to which this Final
Notice relates as it considers appropriate.

FSA contacts

7.7.
For more information concerning this matter generally, contact Lance Ellison (direct
line: 020 7066 2422) of the Enforcement and Financial Crime Division of the FSA.

....................................................................................

Tom Spender

FSA Enforcement and Financial Crime Division

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1. STATUTORY PROVISIONS

1.1. The FSA’s statutory objectives, set out in section 2(2) of the Act, are market

confidence, financial stability, customer protection and the reduction of financial crime.

1.2. 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”.

1.3. LBG is an authorised person for the purposes of section 206 of the Act. The

requirements imposed on authorised persons include those set out in the FSA’s rules
made under section 138 of the Act.

2. REGULATORY PROVISIONS

Principles for Businesses (PRIN)

2.1. The Principles are a general statement of the fundamental obligations of firms under the

regulatory system and are set out in the FSA Handbook. They derive their authority
from the FSA’s rule-making powers as set out in the Act and reflect the FSA’s
regulatory objectives. The Principles relevant to this case are as follows:

2.2. Principle 3 states:

“A firm must take reasonable care to organise and control its affairs responsibly and
effectively, with adequate risk management systems.’

Dispute Resolution: Complaints Sourcebook (DISP)

2.3. The Dispute Resolution: Complaints Sourcebook contains rules and guidance on how

firms should deal with complaints promptly and fairly.

2.4. DISP 1.4.1R(5) states that:

“Once a complaint has been received by a respondent, it must…taking into account all
relevant factors…comply promptly with any offer of remedial action or redress
accepted by the complainant.”