Abbey Life, an insurance unit of Lloyds TSB bank, has been fined a record �1m for mis-selling endowment mortgages.

The fine is the largest ever imposed by the Financial Services Authority as it unravels the endowment mortgage scandal.

The financial services watchdog said the fine reflected the serious weaknesses in the insurer's advice and selling practise.

Weakness in Abbey Life's internal controls occurred over an extended period of time

Financial Services Authority

Abbey Life was run by High Street bank Lloyds TSB until it closed to new business in February 2000.

The bank said it has put aside �165m to pay compensation to customers who were mis-sold endowment policies to as many as 50,000 customers.

"The failings in this case are serious," said the FSA.

Weak controls

Abbey Life is one of a number of life assurers facing payments to policy holders after giving bad advice on endowments.

Millions of consumers are now facing shortfalls in their policies because of the stock market slump and could receive compensation for being badly advised about the fragile nature of their investment.

Carol Sergeant, the FSA's managing director for regulatory process and risk, said Abbey Life staff were not sufficiently monitored.

"Weakness in Abbey Life's internal controls occurred over an extended period of time and exposed large numbers of consumers, particularly those who purchased mortgage endowments."

At the time when most of these problems arose, Abbey Life was a self-contained unit

Lloyds TSB

However, the FSA said the penalty could have been much higher, had the bank not investigated the problem itself.

The group is one of 20 firms that have privately agreed to conduct their own review of endowment sales.

"Senior management has fully accepted its responsibilities to customers and the review now being undertaken should ensure that they receive appropriate redress," said Ms Sergeant.

Different lifetime

Lloyds TSB, Britain's third largest bank, became a major shareholder in Abbey Life in 1988 and fully integrated it into the group in 1996.

In February 2000, Abbey Life was closed to new business.

The bank has now defended much of the criticism by claiming that many of the complaints date back to before 1996.

"At the time when most of these problems arose, Abbey Life was a self-contained unit," said a Lloyds TSB spokeswoman.

It's a fairly downbeat trading statement

Richard Staite, SG Securities

She said 74% of the policies under review were sold between 1988 and 1993 and that the company had voluntarily extended its inquiry to go beyond the 1995 to 1999 period that the FSA was investigating.

Tough times

Lloyds TSB revealed the �165m compensation provision along with a trading statement warning of ongoing uncertainty in financial markets.

But the company sought to reassure investors, saying it was "well positioned to withstand the impact of a potential further economic slowdown".

Analysts were less convinced and highlighted cautious notes throughout the company's statement.

"It's a fairly downbeat trading statement," said Richard Staite at SG Securities.

Lloyds TSB shares closed down 16.5p. or 3.1%, at 514p.

Lloyds TSB said trading in its retail outlets had been stable, but was less confident on company business.

Lloyds, like many of its peers, is having to guard against bad loans as economic difficulties mean many companies are restructuring their debts and repayments.