Bank of Scotland owner Lloyds has been fined £64 million after it heaped extra charges on customers who fell behind on mortgage payments.
The Financial Conduct Authority (FCA) found Lloyds Bank, Bank of Scotland and The Mortgage Business failed to provide enough help to people in payment difficulties or arrears between 2011 and 2015.
It said the banks have paid out "approximately £300 million" to customers as part of a redress programme which is "nearly complete".
Between April 2011 and December 2015 the banks' call handlers did not consistently gather "adequate information to assess customers' circumstances and affordability", the FCA said.
The watchdog said that some of the failings were identified by the banks as early as 2011 but the steps they took "failed fully to rectify" the issues.
Mark Steward, executive director of enforcement and market oversight at the FCA, said: "Banks are required to treat customers fairly, even when those customers are in financial difficulties or are having trouble meeting their obligations.
"By not sufficiently understanding their customers' circumstances, the banks risked treating unfairly more than a quarter of a million customers in mortgage arrears, over several years.
"In some cases, customers were treated unfairly, including vulnerable customers.
"Customers should still pay what is owed, but banks are obliged to treat their customers fairly when making new payment arrangements."
Lloyds Banking Group said it has undertaken a voluntary redress programme to reimburse all 526,000 customers who paid mortgage arrears-related fees.
Lloyds said the FCA confirmed that failings in its processes "were committed inadvertently and that the bank did not seek to gain financially".
A Lloyds spokesman said: "We have contacted all customers who were affected between 2011 and 2015 to apologise and have already reimbursed all who were charged fees at the time. Customers do not need to take any action.
"We have since taken significant steps to enhance how we support mortgage customers experiencing financial difficulty, including investing in colleague training and procedures."
