1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Financial Conduct Authority, the Financial Ombudsman Service and HM Treasury.
2.Mis-selling of financial services and products takes many forms and can cause serious harm to consumers. It happens where, for example, a firm recommends that consumers purchase unsuitable products, or gives misleading information to customers. Over 12 million consumers were mis-sold payment protection insurance (PPI), and firms have paid over £22 billion in compensation to them since April 2011. But mis-selling also happens in many other product areas—packaged bank accounts have been a big area of complaints to the Financial Ombdusman Service (the Ombudsman) in the last year.
3.The Financial Conduct Authority (the FCA) has the lead role in promoting good conduct in financial markets. Its functions include responding to mis-selling when it happens, including making arrangements for firms to provide redress to customers affected by mis-selling. The Ombudsman also plays a role in redress, by resolving disputes between individual consumers and firms. Consumers who have complained to financial services firms and are dissatisfied with the outcome can bring a case to the Ombudsman. Claims management companies, which can bring cases to the Ombudsman on behalf of individual consumers, are currently regulated by the Ministry of Justice. HM Treasury is responsible for designing the regulation and redress framework for financial services.
4.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.
5.It is a failure of the system of regulation and redress that claims management companies have been able to make up to £5 billion out of compensation to victims of mis-selling. 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.
6.The Treasury and the Ministry of Justice published a review of claims management regulation in March 2016, and the Ministry of Justice is consulting on proposals to restrict the fees they can charge. Action now is too late but is still important. The FCA is consulting on proposals to set a deadline, possibly in 2018, for consumers to make claims in relation to PPI. Claims management activity may increase further if the FCA introduces this deadline.
7.The Financial Services Authority, which regulated financial services until April 2013, decided that compensation for mis-selling of payment protection insurance should be achieved through consumer complaints to firms, and to the Ombudsman if customers were dissatisfied. Complaints to firms and to the Ombudsman about payment protection insurance increased massively from 2011 onwards, following the outcome of a judicial review. Of 1.5 million PPI claims to the Ombudsman since 2001, 93% were submitted in the last 5 years. 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.
8.This increase in complaints presented a major challenge to the Ombudsman, which almost tripled in size as new case handlers and adjudicators were taken on. The Ombudsman has worked to reduce the number of open payment protection insurance cases, which have fallen from 445,000 in May 2013 to 234,000 in November 2015. But many complainants about PPI are having to wait too long for decisions. Of the Ombudsman’s open cases in November 2015, 45% are more than 1 year old, and 17% (39,300) are more than 2 years old. Half of the PPI cases closed so far in 2015–16 have taken 15 months or more to resolve. If the FCA implements a deadline on PPI claims this could, in the short term, lead to a further surge in claims to the Ombudsman in order to meet the deadline.
9.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 said that not all PPI cases are straightforward, that cases can take longer to process where judgements are required about how much compensation is needed, and that a Supreme Court decision has added to complexity. 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. The Ombudsman told us that it would take forward the NAO’s recommendation to publish such a plan.
1 C&AG’s Report, Financial services mis-selling: regulation and redress, Session 2015–16, HC 851, 24 February 2016
2 , para 1
3 ; , para 1.4
5 ; , paras 1.7–1.8
7 , para 1.10
8 ; , para 17, 4.19
13 , para 16, Figure 9 and Figure 12
14 , para 16, 4.9–4.10
15 , Figure 13
18 , para 4.9
11 May 2016