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* Lloyds failed to pay customers within 28-day deadline
* Lloyds apologises for 'administrative errors'
* FSA reported decline in payouts in December
* FSA says continuing to monitor PPI payouts
By Matt Scuffham
LONDON, Feb 19 (Reuters) - Britain's financial regulatorfined Lloyds Banking Group 4.3 million pounds ($6.7million) on Monday for not paying compensation quickly enough tocustomers wrongly sold insurance on loans and mortgages.
The Financial Services Authority said that from May 2011 toMarch 2012, Lloyds did not pay compensation to 140,000 customersmis-sold payment protection insurance (PPI) within a deadline of28 days after notifying them they were due a payment.
Britain's banks have set aside more than 12 billion poundsto compensate customers wrongly sold policies meant to protectborrowers who lost jobs or became ill, and Lloyds has made aprovision of 5.3 billion pounds, the highest of any bank.
But the regulator said nearly a quarter of Lloyds' customerswho were entitled to compensation did not receive a paymentwithin 28 days. Around 87,000 had not been compensated within 45days, with 8,800 having to wait for more than six months.
Around 25,000 claims inadvertently "dropped out of theprocess", the FSA found, and were only identified becausecustomers chased payments. It said that even when customersinquired about why they had received no money, Lloyds was unableto fast-track payments or explain why they had been delayed.
"Lloyd's PPI redress payment systems fell well below thestandard the FSA expects, and the size of this fine reflects howseriously we view these breaches," said Tracey McDermott, theFSA's director of enforcement and financial crime.
Lloyds has since paid the correct amounts and compensatedcustomers for the late payments, the FSA said.
The FSA said it was continuing to monitor how firms pay PPIcompensation. It fined the Co-operative Bank 113,300 pounds inJanuary for not dealing with complaints quickly enough.
Lloyds Banking Group said on Tuesday that it had notanticipated the number of complaints it received and made"administrative errors" while attempting to get on top of them.
"We acknowledge that this led to some customers not beingcompensated on time and we apologise to those customers whosepayments were delayed," Lloyds said.
The FSA said on Monday that 360 million pounds was paid outin PPI compensation in December, bringing the total amount sofar paid out to customers to 8.4 billion pounds.
However, that represented a drop in payouts for the thirdmonth running, suggesting the number of genuine claims beingreceived by banks may have peaked.
PPI is the most complained about financial product ever inBritain, with the financial ombudsman service receiving overhalf a million complaints.
