Bank of Scotland has been fined £4.2m after an FSA investigation into complaints by Halifax mortgage customers found that 160,000 homeowners were “incorrectly excluded” from a compensation programme.
Bank of Scotland has been fined £4.2m after an investigation into complaints by Halifax mortgage customers found that 160,000 homeowners were “incorrectly excluded” from a compensation programme after the lender failed to contact them about important changes to the terms of their loan.
The Financial Services Authority said failures in the record keeping of 250,000 Bank of Scotland mortgage customers meant that more than 20,000 borrowers received goodwill payments despite not being effected by the error, while 160,000 entitled to compensation never received it.
The problem was discovered in May 2011 after a wave of customer complaints on internet forums led staff at the FSA to ask Bank of Scotland to look into the matter.
As a result of this, Bank of Scotland found that 250,000 mortgage customers sent offer letters between 2004 and 2007 that contained confusing information about its standard variable rate cap had incorrectly excluded from goodwill payments of £250.
Of these customers, about 160,000 were entitled to compensation worth a total of £162m and the FSA said these customers might never have received the payouts there were entitled to had it not been for complaints of some borrowers.
To compound the error, the investigation discovered that 22,700 customers who never even received the confusing mortgage letters from the bank had received compensation totalling £20.4m, or nearly £900 each.
Tracey McDermott, director of enforcement and financial crime at the FSA, said the errors showed Bank of Scotland’s mortgage records system was “inadequate”.
“This breach is particularly serious because the inaccuracies built up over a period of seven years. There was no structure in place to identify errors as they occurred and no checking procedures thereafter,” said Ms McDermott.
Bank of Scotland could have been fined as much as £6m for the errors, however the FSA reduced the penalty due to the bank’s decision to settle early and co-operate with the investigation.
Halifax and Bank of Scotland, known as HBOS, are owned by Lloyds Banking Group (LSE: LLOY.L - news) following its takeover of HBOS in late 2008 after it came close to collapse at the height of the financial crisis.
“In a complicated organisation where several legacy systems exist, firms have to make sure they are synchronised, otherwise it is their customers who suffer,” said Ms McDermott.
Lloyds is the country’s largest mortgage lender, though its sale of 632 branches to the Co-Op is intended to reduce its dominance of the high street lending market and current account services.