Bank of Scotland has been fined £3.5 million for mishandling complaints about investment products and "failing to treat vulnerable customers fairly".
The bank is expected to pay out compensation of around £15 million to customers once the Financial Services Authority review is complete.
It has already paid out £2.4 million in redress to customers.
Between 30 July 2007 and 31 October 2009, Bank of Scotland received 2,592 complaints about its sales of the Collective Investment Plan, Personal Investment Plan, Guaranteed Growth Bond, ISA Investor and Guaranteed Investment Plan.
An internal review by the bank on a sample of rejected complaints revealed that as many as 45% of the complaints it had handled should have been upheld rather than rejected.
The FSA found that complaints were not investigated properly and the bank failed to recognise recurring problems. Many of the customers affected were older with little or no experience of investments.
The FSA's investigation also found that poor decisions were made on whether the investments were suitable for customers who complained. The bank also failed to analyse trends in its own complaints decisions and those made by the Financial Ombudsman Service.
Had the bank analysed the root causes of the complaints, it could have taken faster action to improve the documentation concerning the risk profiling tool used by the firm to assess customers' attitude to investment risk, the FSA said.
Tracey McDermott, the FSA's acting director of enforcement and financial crime, says: "The firm's failure to ensure it had a robust complaint handling process in place led to a significant number of complaints being rejected when they should have been upheld.
"Had BOS undertaken effective root cause analysis of the complaints it received and had adequate processes in place to feedback lessons learned from past complaints, it could have acted sooner to improve its processes."
The FSA says the bank has now improved its complaint handling arrangements and is carrying out a wide ranging review of advice-related complaints that it rejected between 1 February 2004 and 31 December 2009.
Bank of Scotland has also proactively agreed to carry out a review of its sales of investment products to around 8,000 customers who were classified as having a cautious attitude to investment risk under the firm's risk profiling tool in use from 30 July 2007 to 1 March 2010.
This story was written for Money Observer