Royal Bank of Scotland is to pay a fine of £14.5 million after it failed to address serious failings in its advice to mortgage customers for nearly a year after being alerted by the City regulator.
In one "highly inappropriate" case an employee warned that interest rates could soar to 5.5% while trying to push a five-year fixed rate home loan deal, the Financial Conduct Authority (FCA) found.
The FCA's predecessor, the Financial Services Authority (FSA) first raised concerns about branch and telephone sales at RBS and its NatWest business in November 2011 but no proper response began until the end of September the next year.
It is the latest embarrassment for the state-backed lender after six previous fines in the last four years by the FCA or FSA and covers a period from June 2011 to as recently as March last year.
All of the senior management involved are understood to have suffered "financial penalties" from the bank, likely to mean bonus claw backs.
Brian Hartzer was head of the retail arm of the lender until June 2012 when he left to return to Australia to work for banking firm Westpac.
In an interview at the time he told the Financial Times that he had "rebuilt nearly everything about the place" adding: "The core businesses are in a much better place than they were three years ago."
Mr Hartzer was succeeded by Ross McEwan, who temporarily suspended the lender's mortgage advice shortly after taking over in September 2012 when he became aware of the problems.
Mr McEwan succeeded Stephen Hester as chief executive of RBS, which is 80% owned by the taxpayer, in October 2013.
Responding to the FCA's findings today, he said: "This was unacceptable and should never have happened.
"We have worked hard to put things right. When I joined the bank we completely overhauled our processes, and took all our mortgage advisers off the front line for an extensive period of time to get the training required."
The failings cover a period during which the group sold 30,000 mortgage products on an advised basis, representing £106 million of revenue. RBS has agreed to contact all of the customers to raise any concerns about the advice they have received.
The FCA said: "The firms' failings in respect of their mortgage business affected every customer they advised during the relevant period, in that every customer was at risk of not having received suitable advice."
Its findings showed that only two of the 164 sales it reviewed were considered to meet the required standard.
RBS and NatWest failed to consider fully a customer's budget when making a recommendation while staff did not advise what mortgage term was appropriate.
In a mystery shopping exercise in 2012, three out of nine sales advisers "provided customers with their own predictions as to the future movement of Bank of England base lending rates". This was described by the FCA as "highly inappropriate".
One case saw a customer who asked an adviser if interest rates would rise told: "Yes. Absolutely." The bank employee suggested they could reach 5.5%. Interest rates have been held at 0.5% since 2009.
The adviser recommended a five-year fixed rate mortgage to the customer and told them: "If we don't increase rates with this double dip recession the economy is in dire straits. Rates will rise.
"If you take a two-year deal then rates will be higher after this period."
The sales adviser was subsequently stopped from selling to the public by RBS but another adviser who gave an opinion on interest rates was allowed to continue but with "back to basics coaching".
The regulator said there was no evidence of widespread detriment to customers although where it has been found, the group had taken steps to compensate them.
It is not expected that the provisions made for this compensation will be on a scale that will hit its balance sheet, unlike the billions set aside for other scandals such as payment protection insurance (PPI) mis-selling.
The bank's FCA penalty was aggravated by the fact that it assured the regulator in July 2012 that it was fully addressing the concerns that had been raised even though it should have known this was not the case.
Added to this was the long history of its previous run-ins with the authority. But the scale of the fine was reduced from £20.7 million due to RBS agreeing to settle the case at an early stage.
Tracey McDermott, director of enforcement and financial crime at the FCA, said: "Where we raise concerns with firms we expect them to take effective action to resolve them without delay. This simply failed to happen in this case."
She added: "Taking out a mortgage is one of the most important financial decisions we can make.
"Poor advice could cost someone their home so it's vital that the advice process is fit for purpose. Both firms failed to ensure that their customers were getting the best advice for them."
In 2012, RBS group was the UK's sixth largest mortgage lender with gross lending of £13.9 billion, representing an estimated market share of 9.7%.
Shadow Treasury minister Cathy Jamieson said: "This is just the latest in a series of scandals to hit the sector and the serious failings identified by the FCA need to be addressed urgently.
"These scandals also show why we need proper banking reform, with challenger banks and more competition to rebuild trust in the sector."