Financial services mis-selling: regulation and redress Contents

Conclusions and recommendations

1.Claims management companies have taken up to £5 billion out of compensation that should have gone to consumers. It is straightforward and free for affected consumers to claim compensation through the Ombudsman for mis-sold payment protection insurance. Yet in 2014–15, 80% of complaints to the Ombudsman about PPI were made through claims management companies. In many cases, these companies merely package up payment protection insurance claims, but they typically charge between a quarter and a third of any compensation subsequently paid. The National Audit Office estimates that claims management companies received between £3.8 billion and £5 billion in commission from PPI payments between April 2011 and November 2015. Collectively, the public bodies involved—the Treasury, the Ministry of Justice, the FCA and the Ombudsman—have been too slow in taking responsibility for this situation, and too passive in allowing it to happen. The problem of claims management companies taking too much of the compensation intended for victims of mis-selling was entirely predictable. Similar problems have harmed previous compensation schemes, for example, in 2008 the Committee of Public Accounts found that solictors and other representatives had taken almost £1.3 billion out of compensation intended for former coal miners. The Treasury and the Ministry of Justice recently published a review of claims management regulation. Action now is too late but is still important, particularly as claims management activity may increase further if the FCA introduces a deadline for making PPI claims.

Recommendation: HM Treasury and the Ministry of Justice should report publicly on the effectiveness of their actions in reducing the role of claims management companies in PPI compensation. The Treasury and the FCA should demonstrate how they will ensure that these problems do not happen again with future schemes.

2.The Ombudsman has a large backlog of PPI claims, with many consumers having to wait more than 2 years for a decision. There were around 400,000 new PPI claims to the Ombudsman in both 2012–13 and 2013–14, compared to around 120,000 in 2010–11. The Ombudsman has reduced the number of open payment protection insurance cases from 445,000 in May 2013 to 234,000 in November 2015, but it has a large backlog of older cases—45% of open cases are more than 1 year old, and 17% (39,300) are more than 2 years old. In 2015–16 so far, half of PPI cases have taken 15 months or more to close. Although factors outside the Ombudsman’s control may play a part, the Ombudsman did not give a convincing account of why many cases are taking so long to complete. The Ombudsman has told the NAO that it aims to clear the backlog of older cases by July 2017, but it has not yet outlined a plan for doing so.

Recommendation: By the end of July 2016, the Ombudsman should set out publicly a clear timetable for reducing and ultimately eliminating its backlog of PPI claims, and also report publicly on its progress.

3.The FCA has not done enough to tackle the cultural problems that lie behind mis-selling by financial services firms. The cultures of firms and the nature of their sales incentives have been identified as key factors behind mis-selling. The FCA has taken some action to deal with these root causes, for instance by promoting changes to firms’ incentive structures and better training of financial advisers. The Senior Managers Regime, which the Government is introducing for banks from 2016, aims to get senior people to take greater responsibility for the actions of those they manage. But the risks of mis-selling remain, for example pensions freedoms reforms are a potential trigger for future mass mis-selling. Middle managers in financial services firms were often promoted on the basis of achieving sales targets, making it hard to embed more customer-focussed approaches. The FCA has withdrawn a planned review of banks’ culture, but has not articulated what culture it expects firms to have. There is no guarantee that any improvements in cultures will stick as the regulatory spotlight moves away.

Recommendation: The FCA should outline the actions it will take to improve cultures in financial services firms, and report to us on their effectiveness in a year’s time.

4.The FCA does not do enough to ensure that consumers understand the financial products they are buying and the possibility of claiming compensation. Financial services are complex to understand, even for the most knowledgeable consumers, and this can mean that consumers in this market are particularly susceptible to mis-selling. As conduct regulator, the FCA aims to protect consumers. It told us that it welcomes innovation in new products, for instance in the pensions market to provide greater choice to consumers who do not want to buy an annuity. But product innovation can also make mis-selling more likely, particularly if products are especially complex. The NAO found that the FCA emphasises ensuring that firms adhere to detailed rules, rather than ensuring that firms do enough to check that customers fully understand the products they buy. Consumers also need to be aware that they may be eligible for compensation when mis-selling has occurred. In complaints-led redress schemes, consumers are required to complain to their provider and then the Ombudsman (if necessary). The FCA and the Ombudsman do not appear to have sufficiently considered greater use of automatic enrolment of victims of mis-selling into compensation schemes.

Recommendation: The FCA should set out what more it will do ensure firms check consumer understanding of the products they purchase and of their rights to claim compensation, particularly for vulnerable consumers, and report back to us on this work in a years’s time.

5.The Treasury does not know how effective the FCA is in reducing mis-selling, and there are no good indicators of the current level of mis-selling. Preventing, detecting and responding to mis-selling is an important part of the FCA’s activities—there have been over 2 million consumer complaints to firms about mis-selling in each of the last 3 years, mostly due to payment protection insurance. Mis-selling is the most common area for complaints to the Ombudsman, accounting for 70% of the total complaints it received between 2010–11 and 2014–15. But complaints data provide an imperfect indicator of current mis-selling levels because complaints may reflect past mis-selling rather than continued problems. The FCA’s information on complaints to firms does not identify when alleged mis-selling took place and it does not yet draw together information that could show whether its actions are reducing mis-selling. The FCA does not link the outcomes from its regulatory activities to their associated costs and this means it cannot know whether it has taken the most cost-effective actions. HM Treasury, which is responsible for the overall regulation and redress framework, could not explain convincingly how it would know if the regulatory system is succeeding or failing, and has not developed any meaningful measures of what success looks like.

Recommendation: HM Treasury and the FCA should develop ‘real-time’ indicators of the extent of mis-selling, and assess regularly how effective their actions are in reducing it.

6.Parliamentary accountability for financial regulation is undermined by restrictions on the NAO’s access to information held by the FCA. In order to examine the effectiveness of the FCA in relation to mis-selling, the NAO needs to gather evidence on how the FCA has influenced the actions and behaviours of firms, in line with its regulatory objectives. For example, it needs information on the actions undertaken by firms in response to FCA work on sales incentive schemes, which would include information on bonuses. However, current legislation prevents the FCA from releasing certain confidential information that the FCA holds on firms. The NAO has access to commercially confidential information across a wide range of other government activities, and also to highly sensitive defence, security and intelligence information for the purposes of undertaking its work. Following the financial crisis, the Committee of Public Accounts reported on the need for greater parliamentary accountability for financial regulation.

Recommendation: HM Treasury should outline a timetable for proposing legislation to give the NAO access to information so that it can carry out full examinations of value for money.

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11 May 2016