2Regulating to prevent mis-selling
10.Mis-selling happens for several reasons: products are complex and difficult to understand for even very knowledgeable consumers, and the culture and incentives within firms can make mis-selling more likely. As the lead regulator of the conduct of financial services firms, the Financial Conduct Authority plays a key role in preventing and detecting mis-selling.20 Its functions include authorising firms and individuals providing financial services, supervising firms’ conduct, developing rules of conduct and taking enforcement action where firms break the rules.21
The culture within firms
11.The cultures within firms selling financial services, and the nature of incentives that they provide to sales teams to sell those services and products, are key factors which can make mis-selling more likely. The FCA pointed to the experience of PPI mis-selling, which it said was driven by the culture within firms, whose employees often did not consider the interests of consumers. It said that PPI was designed to meet the cost of loans which were in themselves unprofitable. Firms designed sales incentives for their staff encouraging them to sell PPI rather than just to sell the loan without it.22 Some sales staff used high pressure and intimidatory methods on potential customers to secure sales and thereby meet their targets.23 The FCA raised a range of other possible causes of mis-selling, including: lack of competence in sales teams; badly-designed products which are poorly directed towards the targeted market; and sometimes an intention to rip off consumers.24
12.The FCA has taken some action to deal with these root causes of mis-selling, for instance by promoting changes to firms’ incentive structures. 25 The FCA said that the retail distribution review has led to better training of financial advisers.26 The NAO found some evidence from a selection of financial services firms that the FCA’s actions, together with the large compensation payments following past mis-selling, have encouraged firms to take actions that could make mis-selling less likely in future.27 The Senior Managers Regime, which the Government is introducing for banks from 2016 and across the sector from 2018, aims to get senior people to take greater responsibility for the actions of those they manage. The FCA said it will monitor how the new regime works in practice.28
13.The risks of mis-selling remain, however. 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.29 The FCA has withdrawn a planned review of two important elements of banks’ culture, on promotion of and rewards to middle management, and on whistleblowing. The FCA said it had concluded that completing the work would not add sufficient value, and is taking forward this work in different ways, but the FCA appears better placed than any other body within the system to undertake such reviews of firm culture.30 The FCA has not articulated what culture it expects firms to have, beyond the minimum standards specified by the rules that it sets for firms.31 Smaller firms have complained that limited interaction with FCA can make it hard for them to know how to comply with rules, despite the engagement work with small firms that the FCA outlined to us.32 There is no guarantee that any improvements in cultures will stick as the regulatory spotlight moves away.
Consumer understanding and awareness
14.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. The degree of protection needed may be much greater for groups of consumers who are less engaged with financial services provision, and less likely to approach the FCA and the Ombudsman if things go wrong.33 The FCA told us that it does not formally approve specific financial services and products, although it can impose limitations and restrictions on the way that firms sell them. It has, for example, told firms that they cannot promote contingent convertible securities to retail investors.34 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 make mis-selling more likely, particularly if products are especially complex.35
15.Although it does not lead on financial education of consumers, the FCA can play an important role in encouraging firms to act in ways which help consumers to understand more clearly the products and services that they buy.36 The NAO found evidence from consumer and industry representatives 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.37 Some consumers are affected by a time delay between the sale of financial services products and relevant information appearing on credit records. This means some consumers can take out several potentially unsuitable products such as payday loans in a short space of time, when more real-time sharing of data across firms could help to limit this and therefore protect the consumer. The FCA wrote to us after the evidence session with details of its actions to increase coverage of real-time data sharing and has said it is continuing to monitor developments in this area.38
16.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).39 With payment protection insurance, many consumers did not even know that they had been sold the product, and therefore could not have known that they had been affected.40 The substantial involvement of claims management companies suggests that many consumers were not aware of their right to complain to the Ombudsman, or that making a claim was straightforward and free. The FCA and the Ombdusman have undertaken some activities to raise awareness but these appear to have had limited success—only 24% of survey respondents could name the Ombudsman without prompting.41 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.42
20 C&AG’s Report, para 1.7
21 C&AG’s Report, para 2.2
27 C&AG’s Report, paras 10–11
32 Q 47; C&AG’s Report, para 11
34 Q 7; C&AG’s Report, para 13
36 C&AG’s Report, para 3
37 C&AG’s Report, para 13
39 C&AG’s Report, para 1.8
41 C&AG’s Report, para 4.16
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11 May 2016