The FSA has fined Bank of Scotland £3.5m for the mishandling of complaints about retail investment products.

It has also secured £17m in compensation for customers.

Between 30 July 2007 and 31 October 2009 Bank of Scotland (BOS) received 2,592 complaints about the sale of its Collective Investment Plan, Personal Investment Plan, Guaranteed Growth Bond, ISA Investor and Guaranteed Investment Plan.

Many of these complaints came from older customers with little or no experience of investment products.

BOS, part of Lloyds Banking Group, wrongly rejected many of these complaints and an internal review revealed that 45 per cent of complaints rejected should have been upheld instead.

The FSA investigation found complaints were not investigated properly, not assessed competently, that complaint handlers were not always aware of emerging issues and that BOS failed to analyse trends and carry out effective analysis of the root causes of the complaints it received.

To date, BOS has paid £2.4m in compensation to customers whose complaints were upheld but is expected to pay a further £15m to customers once reviews are completed.

Tracey McDermott, FSA acting director of enforcement and financial crime, said: “This fine reflects BOS’s serious failure to treat vulnerable customers fairly. The firm’s failure to ensure it had a robust complain handling process in place led to a significant number of complaints being rejected when they should have been upheld.

“Had BOS undertaken effective root cause analysis of the complaints it received and had adequate processes in place to feedback lessons learned from past complaints, it could have acted sooner to improve its processes.”

Since the review BOS has improved and made changes to its complaint handling arrangement. It has also agreed to carry out a targeted review of its sales of investment products to around 8,000 customers who were classified as having a cautious attitude to risk under the firm’s risk profiling tool in use from 30 July 2007-1 March 2010.

Ms McDermott said: “This is the second firm to be fined following the FSA’s review of complaint handling in major banks. The review has led to many banks taking significant action to ensure they handle customer complaints fairly.

“The FSA will continue to undertake further intrusive assessments of the banks that remain a concern and we will not hesitate to take further regulatory action if improvements are not made.”