The financial regulator’s ‘Treating customers fairly’ mantra will be taken even more seriously after a near half million pound fine on telephone sellers of payment protection insurance. What are the lessons for financial promotions?
Topic: Financial Services
Who: Loans.co.uk Ltd and the Financial Services Authority
When: November 2006
The Financial Services Authority fined Loans.co.uk Ltd ("LCUK") £455,000 for failing to treat its customers fairly when telephone selling payment protection insurance ("PPI").
LCUK sold PPI as an "up sale" linked with a loan or mortgage, to provide protection in the event of accident, sickness, involuntary unemployment or death. The product proved popular. Between January and November 2005 no less than 14,400 PPI policies were sold and only 19% of all loans and mortgages sold by LCUK during that period were not sold together with a linked PPI.
The product was sold by telephone based on a script in which LCUK sales advisers recommended the product at the same time as the loan or mortgage was arranged.
An FSA visit in August 2005 revealed a number of concerns including:
(a) inadequate disclosure of the price of the PPI. The PPI cost was automatically included in the cost of the loan;
(b) insufficient information was gathered from the customer about their personal circumstances to ensure the sale was suitable. In particular customers were not asked about any existing cover they might already have which overlapped with the PPI;
(c) other sales practices were in place which raised concerns about fair treatment of customers including no wording in the script or procedure to ensure significant terms and exclusions were disclosed to customers before they verbally agreed to buy.
Following this, FSA Enforcement conducted an audit in December 2005. Its findings included:
(a) the compliance department was not fully independent from the commercial aspects of the business;
(b) the compliance resource was insufficient to ensure adequate monitoring of PPI sales;
(c) scripts in use were not compliant with ICOB requirements to gather sufficient information before making a recommendation;
(d) a significant number of advisers were failing to cover all aspects of the sales script provided, including required disclosures;
(e) sales advisers did not consistently record any additional information on LCUK's client records which might be relevant to suitability, for example details of any existing cover they might have in place.
Since then LCUK has made changes to its internal procedures and implemented a remedial action plan after discussions with the FSA. This involves contacting customers who bought PPIs during the relevant period and in some cases offering redress.
In all the circumstances the FSA was minded to impose a fine totalling £650,000, but in light of LCUK's agreement to settle at an early stage of the FSA investigation it qualified for a 30% discount under the FSA's executive settlement procedures. The net fine of £455,000 was required to be paid in full within 14 days of the Final Notice from the FSA.
Why this matters:
This case follows earlier FA enforcement action in respect of PPI sale failings. This was against Regency Mortgage Corporation Ltd, which was fined £56,000 in September 2006.
This action followed the FSA's latest report on the PPI market whose findings included:
(a) firms are not giving customers clear information during the sales conversion;
(b) customers are not being made fully aware that there may be parts of the policy under which they cannot claim; and
(c) where customers are sold single premium policies (in the LCUK case most of the policies were for a term of 5 years) , this is not always done with the best interests of the customer in mind.
PPI sales in connection with credit cards have also recently come in for criticism from the Office of Fair Trading and although the product is clearly an easy sale and highly profitable, there is still some way to go in terms of controlling mis-selling.
This FSA verdict also sends out a warning to telephone sellers of all financial products that if the FSA is involved, sellers can expect mind concentrating penalties if they fail to walk the compliance talk, and this applies not just to script content, but also to internal systems and procedures.