Lloyds Banking Group will spend £283m redressing 590,000 customers who fell into arrears over the course of seven years.
The FCA ruled that Lloyds didn’t do enough to understand customers’ circumstances to be confident that their arrears payment plans were affordable and sustainable between January 2009 and 2016.
All fees charged for arrears management and broken payment arrangements will be refunded, as well as any litigation fees for customers who entered that process.
Lloyds will refund accrued interest on all fees as well as pay an extra 8% due to customers being deprived of funds.
The lender will approach customers itself to prompt them to seek redress.
Jonathan Davidson, the FCA’s executive director of supervision, retail and authorisations, said: “Ensuring fair treatment of customers, especially those in financial difficulties or who are vulnerable, is a key priority for the FCA.
“We continue to engage with Lloyds as it works to improve the way it treats customers in arrears.”
Lloyds has also set aside £700m to cover payment protection insurance costs.
The FCA has set an August 2019 deadline for PPI claims, while in the autumn of this year it will launch a consumer campaign encouraging eligible customers to claim.