Yet again payment protection insurance has been in the news for the wrong reasons. The Financial Services Authority has handed out another substantial fine for PPI phone selling techniques which the regulator described as “the most serious we have found”. Louise Ball dials in.
Who: The Financial Services Authority ("FSA") and Alliance & Leicester plc ("A&L")
When: October 2008
Law stated as at: 6 October 2008
The FSA fined A&L £7m for breaches of Principles 3, 6, 7 and 9 of the FSA's Principles for Businesses (the "Principles") between 14 January 2005 and 31 December 2007 in relation to no less than 211,000 advised telephone sales of single premium payment protection insurance policies ("PPI") offered in connection with 514,000 unsecured personal loans.
Per its Final Notice dated 6 October 2008, the FSA found that during the period A&L had 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);
- 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); and,
- take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement (Principle 9).
As in the case of Liverpool Victoria Banking Services Limited, reported in the September 2008 marketinglaw.co.uk Update, A&L's PPI telephone sales process was flawed. Problems arose in part from an 'assumptive' selling technique, in which advisers sought to find a reason to recommend and sell PPI whenever customers applied for a personal loan, regardless of the customer's real demands and needs. Nor was it made sufficiently clear to customers that the PPI was an optional product.
This resulted in unacceptable levels of non-compliant sales and a high risk of unsuitable sales over a three year period.
In addition, A&L did not have effective systems to train and monitor advisers and ensure the suitability of recommendations. Routine information provided to A&L's senior management did not identify the extent and seriousness of problems with the sale of PPI and adequate steps were not taken in response to issues highlighted in the firm's compliance reports.
The Final Notice states that the PPI sales were generated by either the use of advertising and mailshot campaigns which prompted customers to telephone A&L to apply for an unsecured loan, or as a follow up to an otherwise non-advised online loan application, where the customer had elected not to take PPI cover.
During the telephone conversation with customers, advisers introduced the PPI product, sought to obtain selected customer information and made a recommendation to purchase PPI at the same time as the loan product was arranged.
Accordingly, telephone advisers quoted the amount of customers' monthly repayments with PPI included. Furthermore, it was not explained that a single premium meant that the premium was added to the loan which then incurred additional interest over the life of the policy. Nor was it made clear that, in the event of cancellation outside of the statutory thirty days, a refund was considerably less than a pro rata repayment of the premium.
The FSA's 2007 call review revealed that A&L's approach to sales resulted in the majority of customer calls being handled unfairly where for example, the adviser:
- provided information in an unfair or unbalanced way;
- provided information in a misleading way;
- ignored the customer's reasonable questions (such as whether the PPI was a condition of the loan); or
- would not take a repeated "no" for an answer.
Such inappropriate sales techniques were exacerbated by the bonus scheme operated by A&L. Advisers and team managers were eligible for potentially significant bonuses based on the number of PPI policies sold, the value of those sales and the amount by which those sales exceeded target rates. Advisers also received a much larger incentive to sell PPI than on the associated loan; for example, the FSA found that in 2007, advisers receiving inbound calls needed to sell six loans without insurance to achieve the same bonus they would receive from only one sale with full (life, accident, sickness and involuntary unemployment) insurance.
Why this matters:
A&L has a prominent position in the consumer finance market with significant public recognition. However, it continued to sell PPI by telephone using inappropriate pressure techniques and failed to alter its sales process despite frequent communication (reports, individual feedback and a Dear CEO letter) to the industry by the FSA of what constitutes fair treatment of customers.
Since September 2007, the FSA has sought to impose higher fines upon firms in the PPI market where standards fall below these stated levels. The extent of the financial penalty imposed on A&L reinforces that the FSA does not tolerate inappropriate selling of PPI and that where relying upon a firm's judgement and advice in the course of advised telephone sales, customers must be given objective, balanced guidance in order to make an informed decision.