State-backed Lloyds Banking Group was today fined a record £117million by the City regulator for the way it handled complaints over the mis-selling of payment protection insurance (PPI).

Lloyds apologised to customers affected and said £2.65m worth of bonuses was being withheld from executives as it agreed the settlement with the Financial Conduct Authority (FCA). The group bonus pool for this year will be cut by £30m.

The fine relates to a period from March 2012 to May 2013 when the group assessed customer complaints relating to more than 2.3m PPI policies and rejected 37% of those, many of them wrongly.

“As a result of Lloyds’ misconduct, a significant number of customer complaints were unfairly rejected,” the FCA said.

The fine is the largest ever retail banking penalty imposed by the authority; other larger charges have related to trading scandals such as Libor benchmark rate-rigging and foreign exchange rate manipulation.

Georgina Philippou, acting director of enforcement and market oversight at the FCA said: “PPI complaint handling is a high priority issue for the FCA.

“If trust in financial services is going to be restored following the widespread mis-selling of PPI, then customers need to be confident that their complaints will be treated fairly.

“The size of the fine today reflects the fact that so many complaints were mishandled by Lloyds.

“Customers who had already been treated unfairly once by being mis-sold PPI were treated unfairly a second time and denied the redress they were owed. Lloyds’ conduct was unacceptable.”

Lloyds, which remains nearly 19% owned by the taxpayer after being rescued during the financial crisis, has already set aside £12billion to cover the cost of compensating those mis-sold PPI.

Chief executive Antonio Horta-Osorio said: “We made mistakes in our handling of some PPI complaints. I am very sorry for this. We have been working hard with the FCA to ensure all customers receive appropriate redress.

“That process is now substantially complete. We remain fully committed to improving our operational procedures and ensuring we do the right thing for our customers.”

The FCA found that in March 2012, Lloyds issued guidance to complaint handlers that its overriding principle when assessing complaints should be that PPI sales processes “were compliant and robust unless told otherwise”.

This resulted in some of them dismissing customers’ personal accounts of what had happened to them during the PPI sale.

In addition, Lloyds did not notify complaint handlers of known failings that had been identified in its PPI sales process.

Some customers were told that their complaint had been “fully investigated” when this was not the case.

Lloyds has now launched a programme to re-review or automatically uphold around 1.2 million PPI complaints and set aside a total of £710m to cover any redress due to affected customers, who are being contacted directly.

The group said that following its review, 90% of customers received payment and the remainder will be completed by the end of June.

Chairman Lord Blackwell said: “We are trying to get it right for our customers and to rebuild trust. But we do not get everything right. That means when we make mistakes, we will take responsibility for them. This is what we have done here.”

The penalty comes after Clydesdale Bank was fined £20.7 million by the FCA in April after it found serious failings that meant thousands of PPI complaints might have been rejected unfairly.

Today’s fine comes days after the Government fired the starting gun on a public sale of shares, to be launched within the next 12 months, as it seeks to sell off more of the taxpayer stake in Lloyds.

Lloyds was rescued by the taxpayer at the height of the financial crisis, but the Treasury’s holding has since been shrunk from 43% to just under 19% as parcels of it have been disposed of on the stock market.

The latest fine for Lloyds will come after it was hit with penalties last July totalling £218 million by the FCA and US regulators over benchmark rate-rigging practices.

These included an attempt to rip off the Bank of England over its financial life support scheme, behaviour described as “highly reprehensible” by Bank governor Mark Carney.

In December 2013, Lloyds was fined £28m over incentive schemes that rewarded staff with “champagne bonuses” and put advisers under pressure to hit sales targets or face demotion.