During one of the episodes of Fawlty Towers, a psychiatrist watches Basil's bizarre antics and murmurs to his wife: "There's enough material there for an entire conference". The same could be said of the behaviour of the banks towards their customers over payment protection insurance. As the latest fine imposed on Lloyds Banking Group by the Financial Services Authority shows, it has been the perfect case study in how not to treat your customers.

The latest twist in the saga sums up the failure of management. Having been fingered for selling a duff product, LBG was swamped with complaints. Under FSA rules, the bank was supposed to deal with these in a timely manner but then compounded its original sin by failing to pay compensation within its own deadline. It had 6,000 members of staff dedicated to handling PPI complaints but in almost a quarter of cases failed to pay up on time, and almost 25,000 were somehow dropped from the compensation process. Many claims, incidentally, were probably bogus but the bank's systems were inadequate so it didn't know for sure whether they were or not.

Set against the £5bn the bank has set aside for compensation, the £4.3m fine levied by the FSA is small beer. But think of what the affair tells us about the way UK companies – even the biggest – are run. Mistake number one was to underestimate the scale of the complaints. Mistake number two was to have no strategy for dealing with them. Mistake number three was then to chuck people at the problem in the hope that sheer weight of numbers would compensate for inadequate systems, a lack of experience and inadequate training. No plan, poor management and a failure to invest in people: it is the story of British industry for decades past.

To its credit, LBG put its hands up at an early stage, thereby sparing itself a bigger fine. But the incident is costly in two ways. Firstly, failing to get it right first time is expensive, as all the big banks are now discovering. Secondly, there is a fresh blow to the reputation of the industry, which has never been lower. It makes it harder for the sector to secure its aim of setting a spring 2014 deadline for the public to submit PPI claims.

Given the state of public opinion, the FSA will take some convincing and rightly so. The banks would help their argument if they took the initiative by writing to all their customers expressing the desire to settle all genuine claims within the next 18 months, and then having the systems in place to allow them to do so. That at least would show that some management lessons had been learned.