On 24 February, the National Audit Office of the UK published the findings of a report carried out by the Comptroller and the Auditor General which looked at financial services mis-selling. The definition of mis-selling is currently “a failure to deliver fair outcomes for customers” and this includes providing customers with misleading information or recommending that they purchase unsuitable products.
The report analyses the role of the Financial Conduct Authority (FCA), the Financial Ombudsman Service, the Financial Services Compensation Scheme (FSCS) and HM Treasury in the management of mis-selling cases. This includes a broader analysis of the work done so far in creating a complete and proportionate regulatory response aimed at preventing mis-selling practices in the industry, as well as addressing the means for redress and the punitive actions that have been taken to date.
The overall takeaway from the report is that the prevalence of mis-selling practices has reduced, however, the FCA currently lacks certain records and processes for an accurate assessment. Similarly, it was recommended that such records could be useful in giving rise to the creation of metrics which could be used to assess effectiveness of certain procedures in future.
I’ll now go on to extract some of the key points from the report:
Mis-selling has been a pressing issue facing the financial services industry
The report asserts that, in 2014, 59 percent of customer complaints to financial services firms were connected to claims of mis-selling. This represents a rise of 34 percent since 2010. The prevalence of mis-selling, therefore, cannot be ignored, with the Bank of England referring to mis-selling practices as a risk to financial stability. PPI claims, in particular, have dramatically increased since 2010. To demonstrate, data from the Financial Ombudsman shows that they received 1.49 million PPI complaints between 2001 and 2016, with 93 percent of these claims being lodged since 2010.
Despite all this, there has been recognition that strides have been made to reduce the spread of these illegitimate practices. Since April 2013, the FCA has levelled £298 million in fines against the industry for mis-selling practices. With redress payments, restrictions imposed through the remuneration code and changes to the governance and internal control systems, there are now fewer incentives for firms to mis-sell products.
The FCA needs to develop a strategic approach
The FCA has been praised for its contribution to these efforts in reducing mis-selling and promoting development, which have included the establishment of an innovation hub designed to allow firms to develop new services and products in a space where they can have regulatory support. This helps to mitigate claims of unsuitable products which could be determined to be mis-sold in future. However, it was felt that the current assessment is lacking certain official records and standardised processes which would have facilitated a complete and accurate valuation of the extent of mis-selling practices in the industry. In this way, it was highlighted that the FCA’s redress schemes are not subject to systematic procedures as many claims are dealt with on a case-by-case basis, despite the fact that the chosen form of redress can have a direct bearing on a number of different aspects connected to the claim, e.g., the outcome, the speed of redress and the costs involved in providing redress. Similarly, it has been argued that the general approach of the FCA has been too contingent on monitoring and enforcing obligations, as opposed to focusing on educating consumers about proper and improper sales practices.
It was recommended that a systematic approach and accurate record keeping could be useful in giving rise to the creation of metrics which could be used to assess effectiveness of certain procedures in future.
In response to the report, the FCA have welcomed the results and accepted its findings. They go on to state that “it is unlikely that mis-selling could ever be eliminated completely. Our aim is to avoid and minimise it as far as possible, create the right incentives and culture in firms and to ensure appropriate redress for consumers and regulatory penalties for poor conduct are put in place when it occurs”.
The big winner from mis-selling has been claims companies
The report begins with some stark figures and food for thought. In total, between April 2011 and November 2015, the financial services industry paid out an eye-watering £22.2 billion in compensation for mis-selling claims, with up to £5 billion of that going straight into the hands of claims management companies. The report draws attention to the fact that many consumers fail to receive full compensation because of a lack of awareness of the free services provided by the Financial Ombudsman Service and over-reliance on third parties to represent their case. It was reported that 80 percent of PPI claims with the Ombudsman came directly from these claims companies. It was felt that, although current awareness of the Ombudsman and the services they provide was on the increase, more could be done in this area to ensure that consumers fully understand their rights of access to redress mechanisms.
To conclude, the boom in mis-selling claims is slowly reducing and much of this improvement can be attributed to the work of the FCA and the Financial Ombudsman service, but there is a warning tone in the report. Due to a lack of data as a result of legislative restrictions in place within the FCA, it is difficult to determine whether the culture within firms is truly changing or whether there are still financial incentives in place within firms that wrongly promote the practices of mis-selling. The report also identifies that pension reforms could be a possible trigger for future mass mis-selling. The industry needs to continue its efforts in mitigating the problem, otherwise redress costs and punitive action will continue to prevail.