Monday night's BBC1 expose of irresponsible lending practices at Lloyds TSB revealed how the high-street bank badgered a couple into taking on £100,000 of debt, which they could ill afford to repay. The man was unemployed and mentally ill. The woman was a low-paid, part-time nursing home assistant. Before the BBC's Real Story got involved, the bank was putting pressure on them to sell their home and the woman was contemplating suicide.
The programme rightly focused on the human side of this shabby tale. But the real dynamite was contained in leaked internal Lloyds documents, which showed that this was not just a one-off incident. The bank's senior managers privately admitted that they have a problem across the entire 2,000-branch network.
Branch staff, the internal audit found, are in many cases motivated primarily to maximise bonuses, which depend partly on how many loans they give out. They pay "little attention" to customers' circumstances. Training in more responsible lending techniques was having "little impact on staff behaviour".
Moreover, the prospective borrowers' incomes and spending details "are manipulated to achieve the best outcome for the [Lloyds] adviser, with the needs of the customer and the bank secondary to this objective".
A sample of 185 loans found inadequate documentation in 104 cases and evidence that the borrowers could not afford the loans in another 31. In other words, Lloyds in more than 16 per cent of cases is lending to people who will struggle to make the repayments. The killer admission in the audit document is that "we consider the issues reported are representative of the whole branch network". Lloyds has responded decently in the case of the couple, and has written off their debt entirely. An employee has been suspended.
But the wider problem has not been addressed. Lloyds is determined to paint this as a localised problem. It refuses to acknowledge publicly what is admitted privately - that it has a systemic problem. No one senior is prepared to talk about it, and it is left to the poor press office to field all calls. "Lloyds TSB is committed to being a responsible lender. It is clearly not in our interests to lend money to people who cannot afford to pay us back," goes the bank's formal response.
No, it is not in the long-term interests of the bank and its shareholders, but it may well be in the short-term interests of bonus-hungry branch staff and their managers. The bonuses of all Lloyds staff up to and including the chief executive, Eric Daniels, are not deferred for five, seven or 25 years until the bank finally finds out whether it will get its money back from its loans.
Lloyds and other banks are treading on dangerous ground in offering staff incentives. The appeal is obvious. Many products such as pensions, life assurance and payment protection insurance (which is particularly prone to being mis-sold) don't sell themselves. They have to be pushed actively. Offering sweeteners to branch staff is an effective way of shifting the merchandise.
But Lloyds should be aware of the dangers. Only 18 months ago, it was forced to pay out £100m in fines and compensation for mis-selling high-yield bonds. Known colloquially as "precipice bonds" (by the staff, but not the customers), these bonds offered an enticing rate of interest, but the customer's capital was not guaranteed and was linked to the stock market. More than 22,000 people lost money. Again it was Lloyds branch staff - tempted by inducements from on high - who pinpointed people with large savings balances (mostly the elderly) and persuaded them to take the plunge.
By hiring Carol Sergeant, former head of enforcement at the Financial Services Authority, Lloyds last year appeared to be taking issues such as mis-selling and compliance more seriously. Indeed, I understand that it was a member of Sergeant's team who wrote the audit report.
But while still fine-tuning its staff bonus system, Lloyds seems unlikely to rethink it radically. The system - known as NPV or Net Points Value - is Daniels's baby, introduced by him into the branches when he ran the retail division, and rolled out across the entire bank when he became chief executive.
Daniels, an American schooled for most of his working life in the comparatively "hard-sell" culture of Citigroup, the world's biggest bank, seems unlikely to be deterred by the occasional mis-selling scandal. Only if mis-selling starts to hit the bottom line, with more defaults, will there be more energetic efforts to change selling behaviour and incentive structures. That is not impossible. With personal borrowing at more than £1trn in Britain, the banks are looking at a £10bn headache if 1 per cent of personal customers fail to pay the money back.
Patrick Hosking is investment editor of the Times
