A subsidiary of HSBC, the high street bank, was yesterday hit with a record £1 million fine after the City watchdog uncovered a series of flaws in its insurance sales.

HFC Bank, which operates in the UK under the names Household Bank and Beneficial Finance, sold payment protection insurance (PPI) to more than 160,000 people between January 2005 and December 2007 without checking whether customers needed the cover.

The bank also failed to keep proper records of its PPI sales, did not investigate possible cases of mis-selling and lacked a system that would have allowed senior managers to monitor the sales of PPI.

The bonuses paid to HFC's sales staff - worth up to 25 per cent of their salaries - were heavily reliant on how much PPI they sold.

PPI is usually sold alongside a loan or some other kind of credit, such as a furniture repayment plan, to protect the borrower if they cannot repay the loan. Most of HFC's customers had impaired or non-existent credit histories so could not get finance elsewhere.

The bank said yesterday it was working with PricewaterhouseCoopers to contact more than 160,000 customers who bought its PPI products, to establish whether they had been disadvantaged by the purchase.

Which?, the consumer organisation, praised the record fine set by the Financial Services Authority (FSA) but said HFC should also have been prevented from selling PPI products until it retrained its salesforce.

“The cases involving PPI are one of the worst mis-selling scandals,” Teresa Fritz, a researcher at Which?, said. “We've only seen the tip of the iceberg.”

Eight finance companies have been fined by the FSA over problems with PPI and the sector is being investigated by the Competition Commission, which is due to deliver a preliminary report in May. The FSA is also continuing to investigate other companies' PPI sales.

Which? has set up a website to advise consumers on how to claim compensation.

Margaret Cole, the FSA's director of enforcement, said that HFC's failures were likely to have had a “significant” impact on its customers' finances.

HFC, which became part of the HSBC banking group in 2003, admitted that its activities had been sub-standard. A spokesman said that PPI customers would receive a letter from the bank “fairly soon”, but added that there was no certainty that all were due compensation.

A fine mess

PPI-related fines

Regency Mortgage Corporation £56,000

Loans.co.uk £455,000

Redcats £270,000

GE Capital Bank £610,000

Capital One Bank £175,000

Capital Mortgage Connections £17,500

Home and County Mortgages £52,500

Hadenglen Home Finance £182,000

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