Lloyds Bank announced today that it has agreed an estimated £500m ‘customer review and contact programme’ relating to potentially confusing information about the Halifax standard variable mortgage rate between 2004 and 2007.

The available news provides limited details but the announcement to the Stock Exchange expressly states: “To effect these goodwill payments, Bank of Scotland plc has applied for a Voluntary Variation of Permission (VVOP) to carry out the customer review and contact programme to bring it within section 404F (7) of FSMA 2000.”

I wonder why the deal with the FSA has been structured in this new way. What advantage is there for Lloyds Bank over an ‘own-initiative’ remediation exercise based on root cause analysis of a systemic problem? Is the FSA going to use its new s.404 powers rather than impose new root cause rules? (I wrote about the existing and proposed ‘root cause’ rules in December’s Financial Services Update.)

The self-investigatory and self-incriminating requirements of FSA regulation are uniquely burdensome and, if applied to the letter, will have hugely significant consequences for all firms with any element of commoditisation in their offering, central analysis behind their recommendations or automation in their systems. Add to this a new power (originally intended to be exercised by the Treasury in respect of the industry as a whole which can now be directed at individual firms through the variation of permissions) and firms could be stuck between the rock of the FSA’s s.404 powers and the hard place of complying with root cause rules of their own volition.

We nervously await the publication of the FSA’s Policy Statement on changes to the root cause rules, due in April 2011.