The business - Patrick Hosking laments the Abbey's habits

When the prize for cheating is £19m and the fine for being caught is £800,000, are bank managers und

The Abbey National has just been fined £800,000 for mishandling complaints from customers. The bank, having already been found guilty of mis-selling mortgage endowments, compounded the sin by trying to wriggle out of properly identifying and compensating its victims.

It was a shabby affair, but not that unusual in the financial services industry, parts of which seem to have discarded any notion of a duty of care owed to customers and instead see their primary duty as shearing as much from them as they can get away with.

Abbey, as it now calls itself, did everything we have come to expect from a bank at its most cynical. Ordered to compensate its victims - people abused in perhaps the most important financial transaction of their lives, don't forget - it used every trick in the book to avoid coughing up.

It found against customers, despite not having the necessary documentation. It failed to investigate claims properly. It failed to take proper steps to ascertain customers' attitudes to risk at the time they signed up. In letters, it used language calculated to discourage victims from pursuing complaints. It firmly rejected complaints, only to capitulate the moment its more robust customers threatened to go to the Financial Ombudsman Service. It falsely assured the Financial Services Authority it was following the correct procedures. In short, the attitude was: "Let's see what we can get away with."

Financially savvy customers - those with time and energy, those who decoded the jargon - refused to be fobbed off; but the less confident, less educated and most vulnerable were cheated. In all, 3,500 customers with a legitimate case were wrongly rejected, the FSA found, while another 1,500 were in a grey area.

The most telling point in the FSA report was that the victims would have been short-changed by £19m if the policy had not been exposed. In other words, Abbey stood to make £19m if it had got away with it. That is 24 times the size of the fine (which represents one-thousandth of the profits of Abbey's core personal financial services division last year). You have to question whether these FSA fines are big enough.

It might seem a strange observation just now. After all, the Financial Services and Markets Tribunal has just forced the FSA to halve a £1.1m mis-selling fine meted out to Legal & General because of its flawed investigation and punishment procedures. And Tony Blair, no less, has just taken a swipe at the FSA for being too heavy-handed. The regulator was "seen as hugely inhibiting of efficient business", the Prime Minister said in a speech last month - prompting a furious FSA chairman, Callum McCarthy, to write to him demanding an explanation.

Surely the answer is to reduce the red-tape quagmire for the innocent, while at the same time cranking up the penalties for the guilty. That way the City partly regulates itself, well aware that the potential profit from misdeeds is more than offset by the risk of a hammer-blow fine. So long as the prize for cheating is £19m and the penalty is £800,000, many managers will hardly feel under great pressure to choose the path of righteousness - especially if the chances of getting caught aren't high. Naturally, companies fined by the FSA pay in other ways, such as the bad publicity, the cost of putting things right (Abbey is now reviewing 50,000 cases) and the likelihood of more intense scrutiny in future. But these factors, I suspect, do not weigh heavily. There is a danger that such modest fines will just be considered another normal cost of doing business, and treated with no bigger a shrug than if it were the electricity bill.

One wonders whether Abbey, despite its public contrition, really wants to change its spots. This was its third FSA fine in three years. Its new owner, Spain's Santander banking group, is introducing a more sales-driven culture, putting more staff into selling jobs, creating an incentive scheme and imposing minimum sales targets on employees - precisely the kind of cultural shift that, unless handled very carefully, can lead to more mis-selling.

The size of the Abbey fine was not unusual. FSA fines of top financial services companies have been running at this level for some time. Scalps over the past 18 months include Bradford & Bingley (fined £650,000 for mis-selling investment bonds) and Allied Dunbar (£725,000 for mishandling endowment mis-selling complaints). The only really meaty fine

so far has been a £17m penalty on Shell for

misleading shareholders about its oil and gas reserves, and that was one case where a smaller fine (or none at all) would have been fairer, because it was the victims, the shareholders, who indirectly ended up paying. Following the L&G affair, an internal review is assessing the FSA's enforcement division, but it has no remit to look at fines - an opportunity missed.

Patrick Hosking is investment editor of the Times