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Liverpool Victoria Banking Services (LVBS) has been fined £840,000 for "serious failings" in the sale of Payment Protection Insurance (PPI).
The Financial Services Authority (FSA) said LVBS added the cost of the insurance to quotes for personal loans without customers asking for it.
Interest on PPI payments will be repaid automatically to 14,500 customers who took policies from 2005 to August 2007.
LVBS has apologised for its "past shortcomings".
The fine is the second-largest to be handed out by the FSA for issues over PPI sales, after HFC Bank - part of banking group HSBC - was fined £1m in January.
Sales process 'flawed'
The city watchdog said LVBS, a subsidiary of Liverpool Victoria Friendly Society, did not explain that the cost of PPI was added to the unsecured personal loan. The estimated average cost including interest was £1,600.
If customers realised they did not have to buy the cover and objected to it, LVBS put pressure on them to take it up, the FSA found.
The watchdog said there was no defence in claiming that the details were explained in subsequent paperwork.
"We have made it abundantly clear that firms must ensure their PPI sales processes are up to the required standards and must change their behaviour where necessary," said the FSA's director of enforcement Margaret Cole.
"The LVBS sales process was flawed in its design."
Customer contact
LVBS, which no longer sells PPI, has apologised and said it would be writing to all customers affected.
The 14,500 policies accounted for around half of all personal loan custom between 14 January 2005 and 8 August 2007, it said.
Interest paid on these policies would be refunded automatically and full redress would be offered "where appropriate" after customers were asked to review the terms of their PPI policy.
PPI is insurance for loan repayments if someone loses their income because of ill health or unemployment. The sale of PPI polices has been under severe attack in the past three years, with Citizens Advice describing their sale as a "protection racket".
The Financial Services Authority (FSA) said LVBS added the cost of the insurance to quotes for personal loans without customers asking for it.
Interest on PPI payments will be repaid automatically to 14,500 customers who took policies from 2005 to August 2007.
LVBS has apologised for its "past shortcomings".
The fine is the second-largest to be handed out by the FSA for issues over PPI sales, after HFC Bank - part of banking group HSBC - was fined £1m in January.
Sales process 'flawed'
The city watchdog said LVBS, a subsidiary of Liverpool Victoria Friendly Society, did not explain that the cost of PPI was added to the unsecured personal loan. The estimated average cost including interest was £1,600.
If customers realised they did not have to buy the cover and objected to it, LVBS put pressure on them to take it up, the FSA found.
The watchdog said there was no defence in claiming that the details were explained in subsequent paperwork.
"We have made it abundantly clear that firms must ensure their PPI sales processes are up to the required standards and must change their behaviour where necessary," said the FSA's director of enforcement Margaret Cole.
"The LVBS sales process was flawed in its design."
Customer contact
LVBS, which no longer sells PPI, has apologised and said it would be writing to all customers affected.
The 14,500 policies accounted for around half of all personal loan custom between 14 January 2005 and 8 August 2007, it said.
Interest paid on these policies would be refunded automatically and full redress would be offered "where appropriate" after customers were asked to review the terms of their PPI policy.
PPI is insurance for loan repayments if someone loses their income because of ill health or unemployment. The sale of PPI polices has been under severe attack in the past three years, with Citizens Advice describing their sale as a "protection racket".
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