Lloyds Banking Group has revealed another £450 million to cover compensation for mis-selling of payment protection insurance (PPI) despite reporting strong half year profits.
The figure takes its total bill for PPI to a mammoth £7.3 billion.
Lloyds revealed it was also under investigation by the Financial Conduct Authority over its management of a supplier and PPI complaints handling procedure.
Citizens Advice says consumers could be thousands of pounds out of pocket, and even more distrustful of banks, because of Lloyds rejecting PPI claims first time.
An investigation by The Times found staff at a Lloyds PPI complaints handling centre were advised that most customers would give up if the claim was not successful first time. Lloyds has since terminated the contract of the company responsible for running the claims unit and is retraining staff.
Citizens Advice Chief Executive Gillian Guy said: “The scale of PPI mis-selling was of pandemic proportions.
It is absolutely appalling that Lloyds has not taken its commitment seriously to compensate customers. As a result consumers yet again have lost out on thousands of pounds that was rightfully theirs.
City regulator the Financial Conduct Authority has warned firms to comply with its rules and treat customers fairly.
It comes after Lloyds Banking Group admitted "issues" with the handling of customers' payment protection insurance complaints.
The FCA has previously said that it was looking into PPI firms' complaint-handling procedures and it plans to publish its findings later this summer.
An FCA statement said: "We expect all firms to comply with our rules and treat their customers fairly.
Firms know that PPI complaints must be thoroughly investigated and that appropriate action, where required, is taken promptly.
Our rules are very clear that firms are expected to learn from previous complaints. So if there are significant numbers of complaints coming in about the same thing, that is a clear warning sign that something isn't right.
The FCA said it is aware of the issues raised by TheTimes and it has been working with Lloyds since earlier this year to ensure they are resolved and customers' interests are properly considered.
Lloyds Banking Group said they took "immediate action" after becoming aware of "issues" at their PPI complaints handling centre, run by supplier Deloitte.
A spokesman said the centre is now being run by a new supplier, and staff are undergoing re-training.
This site was operated for us by a third party supplier, Deloitte. Following further investigations, we took immediate action, and in May concluded our contract with Deloitte and moved to a new supplier.
Some of the comments made by trainers to The Times reporter are not endorsed by Lloyds Banking Group and we believe they do not reflect our high training standards or our policies. We believe the comments to be isolated and they are now being addressed.
Following the discovery of these issues, and under the guidance of a new supplier, the employees are currently undergoing re-training in line with our policies and procedures.
To date Lloyds has set aside a total £6.7 billion for PPI payouts, and has paid out more than £4.3 billion to 1.3 million customers.
Lloyds Banking Group has admitted "issues" with the handling of customers' payment protection insurance (PPI) complaints, following allegations that staff were told to ignore possible fraud.
An investigation by The Times claimed that contractors employed at the group's PPI complaint handling centre were coached on how to forge information and advised that most customers would drop their complaint if rejected the first time.
The newspaper sent an undercover reported to train with the company as a PPI complaint handler.
A spokesman for Lloyds said the company has terminated its contract with Deloitte, which operated the complaint handling centre on its behalf:
"Earlier this year we became aware of issues at a PPI complaints handling centre called Royal Mint Court in central London."
Customer dissatisfaction with financial firms has reached a record levels with half a million new complaints dealt with in the last year, the ombudsman service has said.
The Financial Ombudsman Service which settles disputes between consumers and financial firms, said its caseload almost doubled in the year 2012/13, with 508,881 new cases, marking a 92% annual increase.
Four of the UK's big banking groups - Lloyds, Barclays, HSBC and Royal Bank of Scotland (RBS) - accounted for almost two-thirds (62%) of all complaints received by the ombudsman.
The payment protection insurance scandal drove the upswing in complaints, making up almost three-quarters (74%) of the cases dealt with by the service.
Forty-nine percent of cases were upheld in consumers' favour, including 69% of complaints relating to payment protection insurance (PPI).
Natalie Ceeney, chief ombudsman, said: "As levels of confidence in financial services have eroded, it is disappointing that we still haven't seen any significant improvement in complaints handling".
The industry let customers down badly in relation to the sale of PPI. The significant volume of complaints is a product of LBG’s own failings and the least customers can now expect is that redress, when it is due, will be paid promptly.
In short, LBG’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. All regulated firms must treat those who complain fairly and that includes paying redress promptly when it is due.
Lloyds Banking Group was fined £4.3 million by the City watchdog today after up to 140,000 customers had their payment protection insurance compensation payments delayed.
The customers were not paid redress within 28 days of receiving a decision letter and almost 9,000 had to wait more than six months for their compensation, the Financial Services Authority said.
The failings relate to Lloyds TSB Bank, Lloyds TSB Scotland and Bank of Scotland, leading to a total fine of £4.3 million.
Lloyds Banking Group has been fined £4.3 million by the City watchdog for failings that resulted in up to 140,000 customers receiving delayed payment protection insurance redress.
In 2012, double the number of people made claims from failed PPI firms, compared to the previous year, research has found.
Claims management companies take a sizeable chunk of any payout. Consumers who make a claim directly to FSCS keep every penny of their compensation.
Some people may prefer to use a claims management company, but it is important that they understand the charges from the outset and are happy to pay them.