Who: Financial Conduct Authority (FCA) and HomeServe
Where: UK
When: 13 February 2014
Law stated as at: 4 March 2014
What happened:
The FCA has recently handed down its largest ever retail fine of £30,647,400 to insurance intermediary HomeServe for mis-selling.
The FCA found a series of failings within the organisation, which resulted from a profit-driven culture leading to HomeServe taking advantage of customers.
In particular, the FCA found that over the period from:
‘January 2005 to October 2011 [HomeServe] mis-sold insurance policies, failed to investigate complaints adequately, its Board was insufficiently engaged with compliance matters and its senior management were reluctant to address risks to customers if there was a cost implication involved’.
The regulator also found that HomeServe mis-sold two of its insurance policies to no less than 69,000 customers over the telephone by failing to properly explain the price and coverage of its products.
Systemic Breaches
Following their investigation, the FCA found several breaches of their Principles of Business (the Principles). The Principles involved were:
- Principle 3 – Management and control – A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
- Principle 6 – Customers’ interests – A firm must pay due regard to the interests of its customers and treat them fairly.
- Principle 7 – Communications with clients – A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.
The FCA found that systemic failures throughout the business were leading to breaches of the Principles. For example:
- failing to provide management with sufficient regulatory training leading to further regulatory breaches;
- failing to address a bias in remuneration of the sales team which led to an emphasis on the quantity of sales (irrespective of whether customers required the products);
- failing to address a bias in the remuneration of the complaints team which incentivised staff to close as many complaints as possible, thereby not dealing with complaints properly; and
- failing to put in place adequate IT systems which led to some customers being overcharged, while others were charged twice.
Furthermore, many of the customers of HomeServe were of retirement age. The FCA determined this made the breaches even more serious due to the vulnerable nature of the customers.
The Fine
Given the above, the FCA used its full powers under s. 206 of the Financial Services and Markets Act to impose the penalty of £30,647,400 it considered appropriate.
In fact, the fine would have been even larger (£43,782,058) had the FCA not reduced the amount by 30% in reward for HomeServe settling at an early stage in proceedings. The fine, it should also be noted, was on top of £12.9 million already paid out to affected customers in redress to date, which is expected to rise to a total of £16.8 million.
Why this matters:
Clearly, the FCA is willing to flex its new muscles. This does not mean, however, that the fine HomeServe have been dealt should be seen as a one off. In 2013, the FCA issued over £472.3m of fines – another record and a 50% increase on 2012. Though much of that was issued in respect of the LIBOR scandal, the HomeServe fine goes to show that the FCA are also willing to continue the trend for heavy fines in other areas.
This case also tells us that ignorance of regulation is no excuse for non-compliance. Management should ensure that sufficient systems are in place to prevent cultures developing in which customers are mis-sold products, in which complaints are not properly handled, and that, generally, the need to generate profit should be balanced with the need to protect customers’ interests.
