By Kristy Dorsey

The UK’s largest mortgage lender has been slapped with a £64 million fine for the unfair treatment of hundreds of thousands of customers in payment arrears, with authorities warning that equitable behaviour will remain under focus amid the Covid-19 pandemic.

Lloyds Bank, Bank of Scotland and The Mortgage Business – all part of Lloyds Banking Group – were issued the fine for what the Financial Conduct Authority (FCA) described as procedural “failings” between April 2011 and December 2015. The financial watchdog said inadequate controls allowed poor customer treatment to continue for more than four and a half years, even though some failings were identified as early as 2011.

The FCA did not specify exactly how many mortgage customers were affected, but a review of 100 files carried in out 2015 found that 38% suffered unfair outcomes as the banks failed to properly establish the individual circumstances of customers experiencing payment difficulties.

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Lloyds is now nearing completion of a group-wide redress scheme to return £300m to approximately 526,000 affected customers. Launched in July 2017, the scheme covers refunds of fees and litigation costs.

The £64m penalty dwarfs the only other fine to be issued by the FCA for breaches of this nature, a £4.1m penalty issued to Yorkshire Building Society (YBS) in 2014.

A spokesperson for the FCA said on Thursday that she could not confirm whether any other mortgage lenders are under scrutiny for similar breaches. Both the YBS and Lloyds fines stem from industry-wide reviews carried out in the wake of deteriorating economic conditions following the 2008 banking crisis.

Mark Steward, executive director of enforcement and market oversight at the FCA, said other firms “should take note of the actions we have taken today”.

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“By not sufficiently understanding their customers’ circumstances the banks risked treating unfairly more than a quarter of a million customers in mortgage arrears, over several years,” he said. “In some cases, customers were treated unfairly, including vulnerable customers.”

“Vulnerable customers” are those impacted by poor mental or physical health, a marital split, the loss of employment or a range of other factors.

Between April 2011 and December 2015, Lloyds used a Payment Authority Matrix (PAM) that set a minimum percentage which a customer call handler could accept as an alternative payment arrangement without the need for approval from a more senior colleague. The FCA said this made it relatively easy to make payment arrangements, but the practice created a risk of inflexibility where call handlers failed to negotiate arrangements appropriate to customers’ needs.

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These problems were compounded by a “simplification programme” that took place in 2012 as the group attempted to digest the 2009 acquisition of financially-stricken HBOS,. The FCA said the programme resulted in “the loss of a large amount of mortgage collections and recoveries expertise”, with “nearly all” call handlers being new to the role.

Acknowledging Lloyds’ cooperation, the FCA reduced the penalty against the group by 30% from an original fine of £91.5m. However, it warned that appropriate treatment of customers remains in focus.

“The FCA recognises the challenges firms face in this area posed by coronavirus, which only heightens the importance of firms treating customers in financial difficulty fairly and appropriately,” the authority said.

A spokesperson for Llolyds said the group has contacted all customers who were affected between 2011 and 2015 to apologise and make reimbursement arrangements, and has since “taken significant steps to enhance how we support mortgage customers experiencing financial difficulty”.