UPDATE 2-Lloyds fined by UK regulator over PPI payout delays
* Lloyds failed to pay customers within 28-day deadline
* Lloyds apologises for 'administrative errors'
* FSA reported decline in payouts in December
* FSA says continuing to monitor PPI payouts
By Matt Scuffham
LONDON, Feb 19 (Reuters) - Britain's financial regulator fined Lloyds Banking Group 4.3 million pounds ($6.7 million) on Monday for not paying compensation quickly enough to customers wrongly sold insurance on loans and mortgages.
The Financial Services Authority said that from May 2011 to March 2012, Lloyds did not pay compensation to 140,000 customers mis-sold payment protection insurance (PPI) within a deadline of 28 days after notifying them they were due a payment.
Britain's banks have set aside more than 12 billion pounds to compensate customers wrongly sold policies meant to protect borrowers who lost jobs or became ill, and Lloyds has made a provision of 5.3 billion pounds, the highest of any bank.
But the regulator said nearly a quarter of Lloyds' customers who were entitled to compensation did not receive a payment within 28 days. Around 87,000 had not been compensated within 45 days, with 8,800 having to wait for more than six months.
Around 25,000 claims inadvertently "dropped out of the process", the FSA found, and were only identified because customers chased payments. It said that even when customers inquired about why they had received no money, Lloyds was unable to fast-track payments or explain why they had been delayed.
"Lloyd'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," said Tracey McDermott, the FSA's director of enforcement and financial crime.
Lloyds has since paid the correct amounts and compensated customers for the late payments, the FSA said.
The FSA said it was continuing to monitor how firms pay PPI compensation. It fined the Co-operative Bank 113,300 pounds in January for not dealing with complaints quickly enough.
Lloyds Banking Group said on Tuesday that it had not anticipated the number of complaints it received and made "administrative errors" while attempting to get on top of them.
"We acknowledge that this led to some customers not being compensated on time and we apologise to those customers whose payments were delayed," Lloyds said.
The FSA said on Monday that 360 million pounds was paid out in PPI compensation in December, bringing the total amount so far paid out to customers to 8.4 billion pounds.
However, that represented a drop in payouts for the third month running, suggesting the number of genuine claims being received by banks may have peaked.
PPI is the most complained about financial product ever in Britain, with the financial ombudsman service receiving over half a million complaints.