The Financial Services Authority (FSA) has fined Lloyds Banking Group (LBG) 4.3m pounds for delaying payment protection insurance (PPI) compensation to up to 140,000 customers.
Firms owned by LBG - Lloyds TSB Bank, Lloyds TSB Scotland and Bank of Scotland - were penalised by the financial regulator over failings in their systems and controls.
"Between May 2011 and March 2012, LBG sent 582,206 decision letters to PPI complainants agreeing to pay redress to them," the FSA said in a statement.
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"FSA rules state that redress must be paid promptly and, in line with that, LBG aimed to make payment within 28 days of these decision letters.
"However, a series of failures at LBG meant that not all customers were paid redress within that time frame."
Customers were not paid redress within 28 days of receiving a decision letter and 8,800 had to wait more than six months for their PPI redress, the FSA said.
The delays were identified as a result of customers calling to chase Lloyds for payments and media attention highlighting the issue.
"Further, when customers telephoned LBG to enquire about the non-receipt of expected PPI redress payments, deficiencies in its process meant 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," the FSA said.
The watchdog said LBG neglected to establish an adequate process for preparing redress payments to send PPI complainants.
Lloyds was also criticised for not tracking the payments, ensuring staff had adequate knowledge of the process, and for failing to monitor payments effectively.
The group's approach to risk management when preparing redress payments to send to PPI complainants was ineffective, the FSA added.
The bank has since completed a comprehensive review of PPI redress payments. The company has paid interest at 8.0% per annum on the outstanding redress figure and has improved its processes to address the failings identified by the FSA.
"The industry let customers down badly in relation to the sale of PPI," FSA Director, Tracey McDermott, said.
"The significant volume of complaints is a product of LBG's own failings and the least customers can now expect is that redress, when it is due, will be paid promptly.
"PPI is an area of continuing focus for the FSA and we continue to monitor how firms handle complaints and pay redress."
The news comes after Lloyds announced plans to slash a further 940 jobs, bringing the total of redundancies to 31,000 since its takeover of banking and insurance company HBOS in 2009. The move is part of the bank's strategy to turn business around.
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