The Financial Services Authority fined three Lloyds Banking Group divisions a total of £4.3m for delaying compensation payments to customers who were mis-sold payment protection insurance.
In a statement on the FSA's website, the UK watchdog says that failings at Lloyds TSB Bank, Lloyds TSB Scotland and Bank of Scotland's (together: LBG) led to 140,000 customers receiving delayed redress that, under law, was meant to be paid within 28 days of notification of a mis-sale.
The three Lloyd's firms agreed to settle with the FSA at an early stage of the investigation and therefore qualified for a 30 percent discount, however without that discount, the trio would have been fined £6.1m (€5m/$6.7m).
The FSA confirmed that between May 2011 and March 2012, LBG sent 582,206 decision letters to PPI complainants agreeing to pay redress to them.
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 nearly a quarter of those customers were not paid redress within that time frame.
"The industry let customers down badly in relation to the sale of PPI. In short, LBG's PPI redress payment systems fell well below the standard the FSA expects, and the size of this fine reflects how seriously we view these breaches. All regulated firms must treat those who complain fairly and that includes paying redress promptly when it is due," says Tracey McDermott, the FSA's director of enforcement and financial crime in a statement.
Provisions to redress PPI totalled over £12bn for the industry by end of the third quarter in 2012 and could rise further as claims continue to be submitted to the banks. Barclays and RBS have already set aside more for PPI compensation.
Latest data from the FSA show that a total of £8.4bn has been repaid by the industry since January 2011.
At the beginning of this month, Fitch Ratings warned that provisions for PPI payouts will hurt banks earnings in the short and medium term.
In the same vein, IBTimes UK reported that the FSA is discussing with the banks on whether they should implement a deadline to PPI claims in order to slow down the backlog in disputes and billions of pounds in payouts.