Lloyds Banking Group's incentive schemes rewarded staff with "champagne bonuses" and put advisers under pressure to hit sales targets or face demotion, according to the Financial Conduct Authority's (FCA) investigation.
Those who failed to meet sales targets could face demotion and a pay cut of as much as 50 per cent.
More than 200 sales advisers at Lloyds TSB received a bonus even when all of their sales were unsuitable or potentially unsuitable, the report stated.
The FCA said in the worst case it had seen, one adviser sold insurance products to himself, his wife and a colleague to prevent himself being demoted.
The Financial Conduct Authority (FCA) has confirmed Lloyds Banking Group) and Halifax were involved the sale of individual savings accounts and income protection insurance products between 2010 and 2012.
More than a million products were sold to nearly 700,000 customers over the period.
Lloyds TSB also offered a "champagne bonus" that could see an adviser land a windfall worth 35 per cent of their monthly salary.
The FCA investigation said the bonus schemes had worrying "higher risk" features, which offered the potential of an automatic promotion and pay rise.
Lloyds Banking Group's record £28 million fine follows a review by the Financial Conduct Authority's predecessor, the Financial Services Authority (FSA), of sales bonus schemes in the banking industry.
While 20 firms had features that increased the risk of mis-selling, Lloyds' failings were "so serious" it was referred for further investigation last year.
Lloyds apologised to customers and admitted its management of incentive schemes was "inadequate".
It has begun contacting customers that were affected and said it has made major changes to its sales incentive schemes since the issues first emerged in 2011 "to ensure that all its schemes are focused on doing the right things for customers and providing good service".
Lloyds Banking Group's £28 million fine for "serious failings" was increased by 10 per cent as the bank repeatedly ignored industry warnings from regulators, the Financial Conduct Authority (FCA) confirmed.
The bank was fined before for unsuitable bond sales 10 years ago, caused in part by pressure to meet sales targets.
– Tracey McDermott, the FCA's director of enforcement and financial crime
The findings do not make pleasant reading.
Customers have a right to expect better from our leading financial institutions and we expect firms to put customers first - but firms will never be able to do this if they incentivise their staff to do the opposite.
Lloyds Banking Group has said it will address "historic issues" in the taxpayer-backed bank after being fined a record £28 million from city regulator, the Financial Conduct Authority (FCA).
In a statement, Lloyds said:
"Lloyds Banking Group accepts the findings of an FCA investigation into its historic systems and controls governing bancassurance legacy incentive schemes for branch advisers, and has agreed to pay a fine of £28m.
"The Group launched its new strategy in 2011 to fully refocus the business on its customers. As part of that approach, the Group has been addressing historic issues and ensuring that customers get fair and appropriate outcomes.
"Lloyds Banking Group has co-operated fully throughout the enforcement investigation and has agreed with the FCA the next steps with regard to customers."
Lloyds Banking Group has been fined £28 million for "serious failings" in relation to bonus schemes for sales staff, the Financial Conduct Authority said.