The Financial Services Authority (FSA) has fined Royal Bank of Scotland and NatWest £2.8 million for multiple failings in the way they handled customers' complaints.
The banks - part of the same group - responded inadequately to more than half the complaints reviewed by the FSA.
Despite the news, shares in RBS rose more than 1% in morning trading.
The watchdog's investigation found that there was an unacceptably high risk customers may not have been treated fairly due to a number of failings within the banks' approach to routine complaint handling.
These included delays and poor quality investigations into complaints. The banks were also sending inadequate letters to customers which failed to address concerns or explain why complaints had been upheld or rejected.
In additon, customers were not provided with their Financial Ombudsman Service referral rights within the appropriate time period.
Of the complaint files reviewed by the FSA, 53% showed deficient complaint handling; 62% showed a failure to comply with FSA requirements on timeliness and disclosure of Ombudsman referral rights; and 31% failed to demonstrate fair outcomes for consumers.
The FSA's investigation also found that the banks failed to give adequate training to staff handling complaints or to properly monitor complaint handling in branches.
Margaret Cole, the FSA's managing director of enforcement and financial crime, said: "We expect firms to treat customers fairly and that consumers can be confident that their complaints will be dealt with properly.
"The failure of these two high street banks to deal adequately with complaints put consumers at unacceptable risk and the fine of £2.8 million reflects this.
The failings in the complaints handling processes of RBS and NatWest were uncovered during the FSA's review of complaints handling in the UK's major retail banks. As a result of the thematic review, five banks have undertaken significant action to improve their complaint handling.
The FSA said in a statement: "RBS and NatWest have co-operated fully with the investigation, accepting the findings at an early stage and have agreed to make significant changes to their complaints handling arrangements."
The firms agreed to settle at an early stage in the investigation and therefore qualify for a 30% reduction in penalty, reducing the fine from £4 million to £2.8 million.
The regulator said it has required RBS and NatWest to work with an independent skilled person to undertake an extensive review of all parts of their complaint handling arrangements. The FSA is also working closely with the banks to ensure that the changes will lead to effective improvements.
The UK taxpayer owns 84% of RBS after the government bailed out the bank at the end of 2008.
This article was taken from Interactive Investor