Out-Law News | 26 Feb 2016 | 9:55 am | 4 min. read
The National Audit Office (NAO) said that although increased fines and redress schemes appeared to have "substantially reduced financial incentives" for mis-selling, "gaps" in the FCA's record-keeping processes meant that it was not clear whether the regulator was taking the most cost effective and coordinated actions. Mis-selling accounted for 2.7 million, or 59% of the total, customer complaints to financial services firms in 2014; with complaints involving payment protection insurance (PPI) alone accounting for 2.3m complaints, the NAO said.
"Legislative restrictions limit my access to information that the FCA holds on firms, making it impossible to draw definitive conclusions on its approach," said NAO head Amyas Morse.
"The information my staff could see, such as customer complaints, does not show any clear reduction in the extent of mis-selling. The FCA cannot be confident that its actions are reducing the overall level of mis-selling, and it has further to go to show it is achieving value for money," he said.
Financial regulation and enforcement expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA was "damned if it does or damned if it doesn't".
"The real test for the FCA will be whether over the next few years there is a general decline on confirmed mis-selling in a market where sales continue at the same level or higher," he said.
"The difficulties around interpreting the data obtained by the NAO are referenced in its own report. Identifying whether mis-selling has been reduced will almost inevitably only occur a number of years after the original sales in question. History illustrates that it is extremely difficult to identify mis-selling either at the time of sale or shortly thereafter. It is generally the case that any mis-selling becomes clear at the time of either a claim on a policy or upon an investment, with current statistics regarding complaints relating to sales made over the last five or more years," he said.
The FCA was prevented by both domestic and EU legislation from sharing certain information, for example actions undertaken by firms in response to its regulatory activities, with the NAO as part of its investigation. By removing these restrictions to the extent permitted by EU law, the government would be able to increase transparency and improve the effectiveness of the NAO in its role as statutory auditor, the NAO said in its report (58-page / 467KB PDF).
The regulator said that it "accepted" the recommendations of the report, which include developing better ways of assessing the costs and benefits of its work and analysing "alternative" ways of deciding whether products have been mis-sold. The NAO has suggested the FCA consider whether an assessment of the way in which firms test customer understanding of their products would be more effective than the current approach, where the regulator places detailed requirements on how firms describe and sell their products.
"The report makes clear that the recommendations, which we are accepting, are designed to build on the FCA's current strategy and increase confidence that it is achieving its intended outcomes for consumers," the regulator said in a statement. "Protecting consumers from the effects of mis-selling is central to what we do."
"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," it said.
Mis-selling, as defined by the regulators, refers to the failure by financial firms to deliver "fair outcomes for consumers"; for example by providing them with misleading information or unsuitable products. The widespread mis-selling between 1990 and 2009 of PPI products, which were intended to cover repayments due on loans or credit cards by people who could no longer afford them, is the most prominent example, the NAO said. Between April 2011 and November 2015, firms paid out £22.2 bullion in redress to more than 12 million customers following complaints about mis-sold PPI, the NAO said.
Most financial firms responding to requests for information from the NAO reported that they had made changes to their incentive structures to reduce the risk of mis-selling, in part because of the FCA's actions, the auditor said in its report. These interventions have included fines, redress programmes and restrictions on the way in which bonuses can be paid to staff. However, banks' handling of mis-selling complaints has been poor and there has been no noticeable fall in the level of complaints upheld against firms by the Financial Ombudsman Service (FOS) over the past five years, the NAO said.
The FOS, which hears complaints by individual consumers against financial firms, has dealt well with the "unprecedented increase" in its workload due to PPI complaints, but cases were now taking about three times as long to process as they did in 2011/12, the NAO said. In addition, almost 40,000 cases remain outstanding after two years. The NAO also found that too many victims of mis-selling did not receive full compensation, either because they were not aware of their rights or because they used a claims management company (CMC) to file what would have been a straightforward complaint with the FOS. CMCs have received between £3.8bn and £5bn of the £22bn compensation paid out to date, it said.
Fees charged by CMCs to pursue compensation claims on behalf of individuals could be capped at as little as 15% of the value of the award, under plans put forward by the UK government last week. CMCs would also be banned from charging upfront fees in financial cases; and from charging individuals if no relationship is found between that individual and a lender under the proposals, which are currently subject to consultation.
The FCA is due to confirm shortly whether it will introduce a deadline by which consumers who believed they were entitled to claim compensation for mis-sold PPI would have to make that claim. The deadline would not be introduced before 2018 and would be preceded by a £42.2m consumer communications campaign, led by the regulator and funded by the 18 firms responsible for over 90% of PPI complaints, according to last year's consultation on the plans.