The FSA dealt a hefty fine to Liverpool Victoria Banking Services for breach of its Principles for Businesses in misleading thousands of customers into buying payment protection insurance for their personal loans. James Dutson reports.
Topic: Financial services
Who: The Financial Services Authority ("FSA") and Liverpool Victoria Banking Services Limited ("LVBS")
When: July 2008
Law stated as at: 29 July 2008
The FSA fined LVBS £840,000 for breaches of Principles 3, 6 and 7 of the FSA's Principles for Businesses (the "Principles") and associated rules between 14 January 2005 and 8 August 2007 in relation to sales of payment protection insurance ("PPI") offered in connection with unsecured personal loans.
Such a large fine was levied on LVBS by the FSA because it failed to:
- take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems (Principle 3);
- pay due regard to the interests of its customers and treat them fairly (Principle 6); and
- 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 (Principle 7).
The problems stemmed from an 'assumptive' selling technique, in which PPI was automatically included when customers asked for quotations for personal loans. Overall, this resulted in unacceptable levels of non-compliant sales being carried on over a considerable period of time.
Customers phoning LVBS to apply for a personal loan had the additional cost of optional single premium PPI plus interest (which attracted additional interest on top of the interest charged for the loan itself) added to the quotation without the customer asking for it. The paperwork subsequently sent for customers to sign to complete their loan applications also failed to make it clear that PPI was an optional product. LVBS's sales process was flawed in that it assumed that all eligible customers would want PPI.
When customers realised that they did not have to buy PPI and objected to it, LVBS put pressure on them to take the PPI by using specific 'objection handling' techniques. These are recognised sales industry methods for dealing with customer objections via a series of prepared responses such as 'renaming', 'pre-empting', and using 'stories' of positive experiences or benefits other customers have had using the product. This situation was further exacerbated by the financial incentive schemes operated by LVBS for PPI sales staff.
The FSA determined that when it was dealing with customers over the telephone, LVBS provided them with information about the benefits, exclusions, limitations and cost of PPI that was inadequate, as well as being unclear, unfair or misleading.
Further, it was determined that LVBS's processes for monitoring sales were inadequate: the telephone sales process for PPI was flawed in its design and additional operational failures were not detected and remedied through effective monitoring, management information and remedial action.
Why this matters:
The sale of PPI has been one of the FSA's "hot topics" since 2005 and non-compliant firms are targets for enforcement action. The level of the financial penalty imposed on LVBS will strengthen the FSA's message to the financial services industry that inappropriate selling of PPI will not be tolerated and that firms must give customers appropriate and accurate information in good time to enable them to make an informed decision as to whether or not to buy PPI.
This case also underlines the FSA's continued robust stance on treating customers fairly and the importance of having adequate systems and controls in place. Given the level of penalty imposed here, it should act as a deterrent to other firms who may be dragging their heels, and give them the incentive they need to become fully compliant with the FSA's Principles.