CLYDESDALE Bank has been hit with a record £21million fine for payment protection insurance (PPI) complaints handling, after the bank admitted devising a policy aimed at depriving customers of fair compensation.

The Financial Conduct Authority (FCA) has lambasted the bank's practice, first revealed by a Herald investigation in October 2013, of wrongly claiming that it did not have customer records dating back more than seven years, when it fact it did.

Now a former banker who tipped off the FCA two years ago says RBS has begun to withhold customer records in PPI claims.

Clydesdale Bank says it did "not authorise or condone" the supplying of false information to the ombudsman in some cases. But the FCA said it was a key factor in the £20.68m penalty - three times the previous highest PPI-related fine of £7m on Alliance & Leicester in 2008 and five times the £4m on Lloyds in 2013.

Georgina Philippou, acting director of enforcement and market oversight at the FCA said: "Clydesdale's failings were unacceptable and fell well below the standard the FCA expects. The fact that Clydesdale misled the Financial Ombudsman by providing false information about the information it held is particularly serious and this is reflected in the size of the fine."

The regulator said of the 126,600 PPI complaints decided between May 2011 and July 2013, up to 42,200 may have been rejected unfairly and up to 50,900 upheld complaints may have resulted in inadequate redress for customers.

It said in mid-2011 Clydesdale had introduced an "inappropriate policy" which meant PPI complaint handlers were "not taking into account all relevant documents when deciding how to deal with complaints".

Then between May 2012 and June 2013 Clydesdale had provided false information to the Financial Ombudsman Service in response to requests for evidence of individual customer records, the regulator said. "A team within Clydesdale's PPI complaint handling operation altered certain system printouts (in a small number of cases) to make it look as if Clydesdale held no relevant documents and deleted all PPI information from a separate printout listing the products sold to the customer."

The practices were "not known to or authorised by Clydesdale's PPI leadership team or more senior management", the regulator said.

Debbie Crosbie, the bank's acting chief executive, said the regulator had approached the bank in July 2013. New policies had been introduced in August 2014, since when all claims had been properly handled. She said: "We are very sorry for what went wrong, we will be in touch, anything that disadvantages the customer is very difficult for the bank and we apologise for that."

The bank has already provided £806m for PPI mis-selling but admits the final costs are still unknown.

Beat The Banks, a PPI claims management specialist run by former Clydesdale banker Mike Begg, claimed 18 months ago that the bank was unique in claiming it had destroyed all customer records more than seven years old on "data protection" principles.

Mr Begg had persuaded the ombudsman to reopen several cases where he had found proof that the bank did hold pre-2006 records it claimed to have destroyed. His testimony was subsequently backed up by several large Scottish claims companies.

Mr Begg said yesterday that RBS had, since February 2014, become "incredibly obstructive" in providing full customer records once claims were submitted.

"We now have several cases where we have been told no PPI exists, but after pressing for a full file have managed to positively identify PPI was indeed in existence."

A spokesperson for RBS said: "We are not obstructive in any way. Our investigation policies and process are to seek all available historic data, and where there are any gaps we use assumptions that go in favour of the customer."