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Mis-selling: the case for regulation and redress

This month, the House of Commons Committee of Public Accounts released its forty-first report of session 2015-16 which looks at ‘financial services mis-selling: regulation and redress’.  The Committee is tasked with ensuring value for money of public spending and generally holds the government and its civil servants to account for the delivery of public services.

This report addresses some of the regulatory and redress failings which were recently highlighted in a February report by the National Audit Office looking at financial services mis-selling.

The overarching message from the Committee is one of disappointment at the current position of the industry in terms of mitigating the practice of mis-selling.

It begins with the fact that claims management companies have made up to £5 billion from payment protection claims, all of which is profit that has been taken from compensation owed to victims of mis-selling.  The overall feeling is that “departments and regulators have been far too passive in allowing this to happen” and further steps need to be taken by the FCA and HM Treasury.

The report then moves on to make six different conclusions and recommendations which cover a broad range of current obstacles, with possible resolutions.

1. In relation to the £5 billion which went to claims management companies, it is suggested that HM treasury and the Ministry of Justice should report publicly on the effectiveness of their actions in ensuring that consumers receive what they are due, thereby reducing the level of profit which is being diverted to these claims management companies. The Treasury and the FCA should demonstrate how they will ensure that these problems do not happen again with future schemes.
2. It was found that, in order to deal with the Ombudsman’s large backlog of PPI claims, it’s been proposed that, by the end of July 2016, the Ombudsman should set out a public timetable for reducing the backlog of PPI claims. This is particularly significant when we consider that 17% of open PPI claims have been with the Ombudsman for more than two years.  It was also stipulated that this timetable should also be accompanied by transparent and public progress reports.
3. The report concludes that the FCA has not done enough in tackling the cultural problems in financial services firms, where mis-selling practices often arise as a result of sales incentives. It was felt that the Senior Managers Regime represents a step forward in effecting cultural change, however, further action is necessary and the FCA has been set a deadline of one year to enact a plan for future action.
4. It was felt that the FCA is not doing enough to ensure that consumers understand the financial products they are buying, or understand that they have a right to possibly claim compensation. Therefore, it is suggested that the FCA should set out what else it will do to ensure firms promote consumer understanding of the products they sell.  There should also be special emphasis on educating vulnerable consumers about their rights.  In this regard, the Committee of Public Accounts stipulates that the FCA should report back on the actions it has taken to achieve these goals within one year.
5. The report outlines that the Treasury does not know how effective the FCA is in reducing mis-selling and that there are no good indicators of the current level of mis-selling. Therefore, it has been proposed that HM Treasury and the FCA should develop ‘real-time’ indicators of the extent of mis-selling, and regularly assess how effective their actions are in reducing it.
6. One particular area of frustration, which was highlighted in the February NAO report, was the fact that there are stringent restrictions in place on the accessibility of information held by the FCA in relation to mis-selling. Therefore, HM Treasury has been tasked to create a timetable for a legislative proposal that will give the NAO access to information to carry out a full examination.

These conclusions highlight the need for more action in mitigating the practice of financial services mis-selling.  This report should represent a wake-up call for the FCA, HM Treasury and the Financial Ombudsman to implement a new and improved regulatory and redress strategy that will help eliminate a long-standing and costly issue which has plagued the financial services sector over the past few years.