Banking Standards - Minutes of EvidenceHC 860

HOUSE OF COMMONS

HOUSE OF LORDS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

SUB-COMMITTEE J

PANEL ON MIS-SELLING AND CROSS-SELLING

THURSDAY 31 JANUARY 2013

NATALIE CEENEY CBE and TONY BOORMAN

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Parliamentary Commission on Banking Standards

Sub-Committee J-Panel on mis-selling and cross-selling

on Thursday 31 January 2013

Members present:

Lord McFall of Alcluith (Chair)

Mr Andrew Love

Mr Pat McFadden

Lord Turnbull

Examination of Witnesses

Witnesses: Natalie Ceeney CBE, Chief Executive and Chief Ombudsman, and Tony Boorman, Deputy Chief Executive and Deputy Chief Ombudsman, Financial Ombudsman Service, examined.

Chair: Welcome, Miss Ceeney, to this session of the mis-selling and cross-selling panel. You will have heard the evidence the banks presented to us previously. Broadly speaking, they tell us it was a misunderstanding, that there was an excellent relationship between the FSA and individual banks in getting this thing sorted out and that it was just unfortunate that the time scale was so long. Pat, what is your point on that?

Q683 Mr McFadden: I would like to begin by asking you to comment on the narrative we have been given over a number of evidence sessions. It can fairly be summed up as follows, and this is the banks’ version of events, if you like: there was nothing intrinsically wrong with a product that was there to ensure against ill health, absence from work or another such eventuality, and the banks did not bundle it up with other products, so people were free to take the mortgage or the credit card, but not the product itself. The banks understand that they have to pay out, but the real reason they think they have to do that-I am paraphrasing here-is that the goalposts have shifted and that the criteria that have been given for claiming compensation are so broad and all-encompassing that it would be almost impossible not to fall foul of one of them. So, in their heart of hearts, they do not really think they did much wrong. I just want to begin with that and get your take on that version of events.

Natalie Ceeney: It probably won’t surprise you to know that that is certainly not our narrative. I find some of the statements about people in senior positions in banks being confused at best implausible. Perhaps I can give you a slightly alternative narrative and tell you how we would see it. The ombudsman has seen this right from the beginning; we are a body whose jurisdiction has covered the whole of this period. In fact, one of our predecessor bodies started raising issues about PPI in 1995-just to give some extreme dates. Some of the concerns we have been expressing for many, many years around PPI relate to the same issues we are seeing now. The 1995 annual report of the banking ombudsman talked about how loan-protection products were being sold-essentially bundled in-with other products, with consumers being given the impression they had to buy them. So I would absolutely reject any notion that any of these issues is new.

What is certainly true, though, is that the problem has grown in terms of complaints. One of the reasons for that is that a characteristic of financial services is the asymmetry of information between consumers and banks. Some 20 million PPI policies were sold before 2005, so this is, again, certainly not a new problem. But the issue really only came to public prominence when consumer groups started making public statements, and there was the Citizens Advice super-compliant and some of the activity from there, which really raised public awareness. At that point, a lot of the issues we had been seeing in a very small way started to manifest themselves in large-scale complaints.

We are an evidence-based organisation, so we could not really shout from the rooftops until we saw enough complaints to shout about, although we had been ringing alarm bells for many years. Once we started seeing significant volumes of complaints about mis-selling, which happened from about 2007 onwards, we-first, Tony, and then, when I joined, both of us-were very active personally in raising concerns with senior executives across all the major banks. I have personally sat in a number of meetings with senior executives of all the major banks from the point I joined, in 2010-Tony has done it from 2007-explaining exactly what we think is wrong with PPI. We have had test cases on our website since 2008 explaining the individual issues with the products. I would certainly say that I do not think the game has changed at all. The issues have been constant throughout the whole of that period. Just to restate what I said, I find it implausible that people are saying that it has all come as a big surprise.

Q684 Mr McFadden: We have been interested in the contrast between the stories you hear of banks holding out as long as possible, going for judicial reviews and really fighting this, and the consumer case of Tesco and the horsemeat the other week, where the retailer’s response was, "We’ve got a problem. This is reputationally damaging for us." Within hours, you could get a refund on what you had bought, and you could take it back; within days, they had full-page apology ads in the newspapers. We are interested in the culture. What do you think it says about the culture of banking that there is a contrast between that very quick realisation of reputational damage, followed by attempts to do everything possible to try to stop it, and the banks trying to have the benefit of the doubt all the time, from 1995 to the present day?

Natalie Ceeney: Maybe I can generalise slightly to answer your question. The ombudsman service deals with over 100,000 financial businesses, so we really do see everything. There are some big differences between individual businesses. I talk to chief execs who, if something hits their radar that is wrong, absolutely take the Tesco stance. I also talk to some large institutions who seem to take more of a, "Where in the rules does it say I couldn’t get away with that?" stance. Frankly, that is very disappointing. You can see a lot of evidence of that in our own data, which we are very transparent about and which we publish. The ombudsman service’s job is to consider complaints, so the customer has already gone to the business and expressed their case, and the business has already had a chance to sort it out. We find against those businesses 90%-plus of the time, which should send out alarm bells that something is wrong. Some of the big banks certainly have fallen into that category across a lot of products, and certainly across PPI. I cannot say much more other than if I were a customer I would find it very disappointing; as the ombudsman, I find it very disappointing.

Q685 Mr McFadden: To state the blindingly obvious, the customer was not well served here not only by the banks but-I am not singling out the FOS here-by the state’s organisations in general. We had a passing of the buck, and an awful lot of delay between the OFT, the Competition Commission and the FSA. They took years through thematic reviews and all the rest of it, which contributed to this ludicrous time scale for sorting all this out.

Looking at the new regulatory set-up and the FCA starting out, do you have confidence that, in a similar sort of situation, that degree of silo-thinking and delay would not happen again, if we fixed it, or would it still be a problem?

Natalie Ceeney: I am an optimist. I think that the legislation that has come through in the Financial Services Bill’s changes to FiSMA leads us in the right direction. Perhaps some lessons were learned from PPI. Let me look at those individually. One of the issues is how you pick up things such as this sooner. It cannot be about waiting until people complain. People will often complain many years after the event, particularly if the product does not do what the description said. Consumers will not necessarily know until they try it. Some of the indications from the FCA that it wants to look at business models, incentive schemes, profitability, penetration rates feel to us to be absolutely right. They were all some of the reasons why we have been shouting since 1995, because we heard some of those alarm bells, but the evidence complaints did not come until later. That is the right direction of travel, and I think that some of the powers around that feel right.

Another area that I would flag up is how enforcement and redress is used. The FSA had a wide set of powers; the FCA has more, which, again, is positive. One of the problems of the past was that often the response to a failing was a fine, and for many institutions that has simply been a small cost of doing business, and actually the profits of continuing can be far in excess of the fine. Something we have been public in flagging up about PPI and, in fact, we put it in writing to the FSA in 2008 was the view that we should use enforcement action to put wrongs right, for example, using proactive compensation or asking firms to write to their customers and do proactive redress, rather than necessarily waiting for individuals to complain. I think that there is increasing use of that approach by the FSA at the moment, and, again, the new powers lead it in that direction. It feels right to move away from fines being the only answer.

Speed is the other issue that you flagged up. I hope that some of the powers that the FSA and the FCA will have mean that they can act more quickly, particularly on embracing greater transparency. We have found some benefits from publishing complaints data in that the firms that put ethics at the heart of what they do have responded very quickly to some issues. I hope that the FCA will also be able to use transparency to harness public attitude to help change. The tools are there. Whether things happen depends on whether they are used.

Q686 Mr McFadden: We have had the FSA announcement today on the review of interest rate swap mis-selling. It is trying to define this notion of caveat emptor and make a distinction between sophisticated and non-sophisticated customers, and that is tricky territory. Some people have said that that could be the next mis-selling scandal. What are your thoughts on what you have seen? I am talking specifically about this notion of where you can draw the line-given the information asymmetry-between a customer who can rightfully expect redress, because they have been defined as non-sophisticated, and one who is sophisticated and supposed to be able to look after themselves.

Tony Boorman: That is an absolutely fair set of questions, and I do not think that they have straightforward answers. I do not think that those things are simple. Certainly, from our perspective, our approach is always to look at the individual case and at the individual circumstances. Drawing legal lines across the rich tapestry of small businesses, medium-sized businesses and how they have interacted over many years on this particular topic is a genuinely difficult task. That is one of the challenges for a regulator, it seems to me, in dealing with the redress scheme, and one of the ways in which our organisation can play a useful role in supporting effective redress, where it is often about the very individual set of judgments that you describe.

The FSA announcement today sets out a broad framework within which the industry will be required to act. Going back to your previous discussion, one of the positive signs is that the cycle time for this announcement by the FSA has been so much faster. No doubt, people would have wished it to have been faster, but it has been so much faster than we have seen with PPI, and that is a good thing.

Q687 Mr McFadden: But this caveat emptor thing cannot just be about the size of the company, can it?

Tony Boorman: No, certainly not. You are getting into the details of exactly how these products were expressed and what was said on the telephone between the bank and the small business in 2007-08-personally, those are the cases that I am looking at today-and making very individual judgments based on some very individual circumstances. As I understand the FSA’s proposal, that is the set of considerations-and the particular technical support-that they will be looking to the banks to use to do those reviews and look individually at the different circumstances of the individual customer. That has to be right.

Q688 Mr Love: To follow up on that, you are of course limited to the small businesses that you can look at. Has that been a difficult limitation? In other words, are a lot of the businesses affected larger ones that would like to be able to come to the ombudsman? Is there any sign in the FSA statement that it is going to allow you to take a more proactive role in this?

Tony Boorman: Is it a difficulty? I think that any boundary of jurisdiction, to use that terrible phrase, is a problem. The definition of micro-enterprise that we work with, which is the one that originally comes from Europe, is sometimes not quite as straightforward to work through as one might like-"How many employees did you have when you made the complaint, and what was your turnover?" So there are some practical issues around that.

Q689 Mr Love: Have you had to turn away a lot of business inquiries?

Tony Boorman: We have turned away a lot of inquiries on the basis of our jurisdiction on this issue. The FSA looked at that, and we very proactively-in discussion with them-offered the possibility of a particular special scheme to support this initiative. They concluded, in their statement today, that that was not what they thought was necessary, and they thought that there was a sensible boundary. As a general principle, we do not disagree that there is a sensible boundary between large businesses that should be using the courts for their disputes, which is an appropriate vehicle for doing so, and small businesses and customers at home that should be using a scheme such as ours.

Q690 Mr Love: But to be absolutely clear, you would have liked a special scheme that would have given you more flexibility about the size of business on which you can take a case?

Natalie Ceeney: We are actually completely neutral on the issue. We offered, if it was helpful, to run it, and that if it wasn’t, we wouldn’t. It was a completely neutral offer, and we do not have a view. We were set up by Parliament to consider complaints; it is really up to others to set our jurisdiction.

Q691 Chair: Lord Turnbull is going to come in about bringing the banks to book and how long that process took, but I am interested in the FSA relationship. The Treasury Committee brought that to the attention of the FSA. In fact, I personally brought it up in November 2005, and asked them to look at that issue urgently.

I note from your website that your chairman wrote a letter on the wider implications to the FSA on 1 July 2008, saying that, "it is apparent to us that this number constitutes a tiny fraction of those who would be entitled to redress." From our point of view, the FSA had a deaf ear on this issue and perhaps did not think it serious enough. In a subsequent lecture that Martin Wheatley gave, he admitted that the FSA did not look at the business models, so they did not look at the P and L accounts. How a regulator cannot look at that if it is going to carry out its duty properly is beyond us. That aspect of the relationship with the FSA is very important. Can you elaborate on it?

Natalie Ceeney: We are two distinct bodies. The ombudsman’s job is to consider individual complaints and, of course, one of our responsibilities is to share with the regulator the evidence that we see. We take that responsibility very seriously, and you will see that our 2008 letter does exactly that. To give a bit of context around that, when we started seeing substantial numbers of complaints from 2007 onwards, we started talking formally to the FSA, so the 2008 letter is a culmination of all the discussions.

We do not always know what the regulator does with our evidence, and it is not always appropriate that we know. They should, rightly, be getting evidence from a lot of sources. As Martin Wheatley has said in his own evidence, we would share the view that the FSA did not take the action that was necessary to stop what was happening at the time. You will see from our 2008 letter that what we were proactively calling for was to move away from the idea that every individual had to complain, because the scale was already so great in 2008.

Our view was that allowing every individual to complain would mean that only those who were the most vocal and who had the wherewithal to complain would do so, and that was discriminatory against those who did not necessarily know that they had been sold PPI or who did not have the ability to complain. One of our big disappointments was that that advice was not heeded. We are now in a situation in which 50 million PPI policies have been sold and we are just waiting for everyone to complain, and that still does not feel like the right answer.

[Mr Andrew Love took the Chair.]

Chair: Lord McFall has been called out to an emergency call. He will continue when he returns. Lord Turnbull will ask his questions.

Q692 Lord Turnbull: I am trying to understand and break down the nature of the abuse. In the first kind of case there is a perfectly decent product that is reasonably priced, but I found myself buying it when, if I had had more opportunity, I would not have bought it. For example, you have worked in the public sector, where sickness benefit is quite extensive and generous, and you thought, "I will self-insure, because my employer does quite a lot of this." People are exploiting you and hustling you at the end of a transaction to buy something and not really telling you that you do not need to buy it.

Tier 2 is where you are buying a perfectly reasonable product that you can use, but you are simply paying too much for it. This is exploiting the asymmetric information. The banks know that the likelihood of your making a claim is x-quite low-but they are charging you two or three x. You could say, "Well, that is down to you." We may come on to caveat emptor later.

The third is bundling, where, in the product itself, different kinds of protection are bundled together and you are paying for the range of coverage, then some of it turns out to be something that you cannot claim on. Included in that are all sorts of things, and one of them is loss of earnings. You are retired and you do not have any earnings to lose, yet it is all in this product.

First, do you think that that is a useful way of categorising the problem? In the complaints that you have looked at, does one or other of these categories account for more than the others?

[Lord McFall took the Chair.]

Tony Boorman: Goodness! I think it is a useful way of categorising it. From our perspective, what we have seen is that there are a bunch of cases exactly as you describe, where the customer has been forced, bullied or actively encouraged- somewhere on that spectrum-to buy a product that perhaps was not at all suitable for their needs. There is a set of legal questions in here about whether the firm was advising them to buy it, or whether it was simply providing them with information. Banks and sellers of this product needed to be a lot clearer about that than they often were. Sometimes, the customer did not know that they were buying the product at all.

Q693 Lord Turnbull: There are two of them here.

Tony Boorman: That’s a really important point, because a classic line, if I can turn myself briefly into a bad insurance salesman, that we see with many of the sales is: "I will be prepared to provide you with that loan, sir. It will be £150 a month fully protected. Is that all right?" The person responds, "I suppose I can afford £150 a month", and suddenly you have brought the loan that you intended to buy for a price that you believe you can afford, and that is probably what you were focused on as a customer coming in for a loan. At the same time, those magic words "fully protected" have sold you, at least in the view of the bank, a payment protection insurance policy. That is an extreme case, but we do see them; I have seen cases exactly as I described.

There is then a set of issues about advice and whether people drew attention to the complicated way in which these products interrelate with your circumstances. The way in which insurance law works, and the way in which the regulatory system from 2005- and before then with the self-regulatory codes-works, is entirely clear. It is an obligation of the person selling insurance to draw your attention to the critical features of what is being sold.

We, our predecessors and the courts have all been clear about what that means in practice. It does mean someone saying, "I am sorry, sir, you are 75. Our policy does not provide any cover for someone over 75. If I am advising you, I need to say that it is not a sensible product for you to buy." There are those different streams. Which one is the dominant one?

In reality, I can probably answer that the sales practices were such that many and all of those problems that you describe were interwoven in many of those sales. Customers were simply not given the information that they should have been given about the interaction of their circumstances with this quite complicated and often very expensive product. It was not a cheap product, certainly in terms of how much you were likely to be able to claim under it. Sometimes people simply did not know that it was there. I am afraid that that is a long answer to your question, but all of those features are very common and often featured in multiple.

Q694 Lord Turnbull: There is this tipping point where you suddenly go from upholding the banks in 80% of the cases to, within a year, simply flipping to a situation where in some instances you are upholding 5% of cases in the bank’s favour and 95% in the customer’s favour. What were the grounds for this marked change in your view of the merits of the cases?

Tony Boorman: Customer complaints changed. That is the simple answer to that. Our original picture, as a service, was almost entirely, for the first 10 years plus of this story, of customers who were disappointed because their claim had been turned down. The response that we were giving in a large number of those cases was, "Yes, I am afraid that your insurer can turn your case down. You were over 75 and you already had the heart problem that you now wish to claim for", or, "Your redundancy was a voluntary one, so it was not covered under the policy."

Q695 Lord Turnbull: That is a rather purist view. You could say that the insurer has rightly turned you down, but does that not lead you to the conclusion that they should not have been offered that insurance if the insurer was never going to pay out?

Tony Boorman: And those were the sorts of cases that were increasingly raised from 2006-07 onwards. You draw in an important question, which is an ongoing dilemma for the ombudsman service, which is expressed in essence as, "How far do we start from the broad proposition of the dissatisfaction that a customer expresses to us when they say, ‘I could not make a claim.’?" Do we just respond to the broad proposition of that question? How far can we go on to say, "Actually, no, that is not your complaint at all. Your complaint is the completely different one over here"? That is not a straightforward leading question.

Q696 Lord Turnbull: In the later period, when you were tending to uphold these complaints, what were the grounds for that?

Natalie Ceeney: If I can give some context and volumes, I will answer that. We had fewer complaints in the whole of 2007 than we now have in three days about the operation of PPI. The volumes before 2007 were tiny, and, as Tony said, they were mostly about claims. What happened around 2006-07 was the big publicity-there was the super-complaint, all the consumer groups started talking about it and there were the Competition Commission and the OFT inquiries-so the volume went up. What often happens-this links to the information asymmetry point-is that there is public noise from people saying, "You might have been sold a product you didn’t need or want or didn’t know you had." As complaints started to come in, people started to articulate their complaints in much larger volumes. We investigated them as mis-selling complaints, and we found that an awful lot had been mis-sold.

Q697 Lord Turnbull: At what point do you think the banks should have realised-this is Pat McFadden’s view-that they should start clearing the shelves? When should they really have known that some of them would have to deal with it, rather than go on fighting and defending it?

Natalie Ceeney: If I’m honest, it was back before 2000, because this was happening-this was known. Although not many consumers complained about mis-sales back in 2000, we were seeing a few and we were talking about it publicly. Consumer groups had started to talk about it publicly, and the banks were making a lot of profit. You have to come back a bit and ask what the triggers are that make you say, "Hang on, something’s going wrong."

I will move on to a completely different example. There are examples where we see very small numbers around a product, but we still raise alarm bells and talk to firms. In answer to Pat’s example, sometimes we have a conversation with a financial services business about one or two complaints of something going wrong, and that business will say, "That’s really important. We’ll do something about it." The question is, what trigger do you need for someone to act? I would argue that it is when a problem happens.

Q698 Lord Turnbull: When did the figure that shocked a lot of people-that the ratio of payout to premium was as low as 15%-become apparent? I know the figure was circulating at the time of the Competition Commission and OFT investigations, but was it publicly known in the early 2000s?

Tony Boorman: I will quote, if I may, from our predecessor, the insurance ombudsman. This is from his 1997 annual report: "Another feature of these insurances"-he is obviously discussing payment protection insurance-"is the lack of transparent pricing. The lenders are helping themselves to substantial sums in commission. Indeed, for the most part, they"-rather than the insurer-"decided the price the insured would be asked to pay. When premiums do have to be returned"-that was an approach the ombudsman often took, just as they do now-"we are often struck by how little the insurer has to refund, and how much was being retained by the seller." The underlying economics of this product were well known to the sector and those who, like ourselves, were observing it from 1997, if not before.

Q699 Lord Turnbull: What we learned is that it was not the banks that provided the insurance. They went and bought a policy from an insurer, which presumably was a deal between two knowing parties. However, what the insurer charged for the policy was not what was passed on to the customer-that was much higher-and the banks knew just how profitable that was.

One of the recurring issues in this Commission has been how often banks look at whether this is too good to be true. You might call it the Nick Leeson test. I don’t think that happens very often. Do you think that banks should be doing more? Should they have an A team, which devises the product, but submits it to someone else and says, "This is role play. Imagine you are a customer. What would you do? Would you actually buy this product if you knew its full economics?" We have seen little evidence of that. The evidence is the opposite, which is: knowing how powerful it was, they clung on to it way beyond the point at which it was legitimate to do so.

Natalie Ceeney: I am in danger of stepping into the regulator’s shoes. The ombudsman’s job is simply to look at what goes wrong and tell people. But certainly, as a chief executive myself, my belief is that you have to do what is ethical and what you deliver is something you have to be proud of. That is certainly the level of conversation I will have now with chief executives of financial services firms if we see things that you cannot be proud of. That is the language I will use now. So, could banks be proud of these sales back in 2000? I would say that an awful of them would have to answer no, that does not feel like a good business model.

Q700 Lord Turnbull: But if you took this product to the senior echelons, they would say, "Clearly, there is a social purpose to encourage people, when they take out unsecured loans-not just for them, but for us as lenders-to insure. We have always insured our mortgages." So they then comforted themselves, as Pat McFadden said, that this is a perfectly defensible product. Somehow or other, a perfectly rational and defensible product becomes one that is illegitimate and exploitative.

Natalie Ceeney: Sadly that often happens in financial services. One of the characteristics of the things we see go wrong is that a product that is absolutely suitable for one proportion of the market is then sold in a widespread way to proportions of the market that are not suitable. Mortgage endowments are a very good example of that. Alarm bells should have rightly rung when mortgage endowment penetration hit about 90% of the mortgage market.

PPI was certainly a product that was suitable for some people, if priced appropriately and sold to the right people. The problem is that it was not always priced appropriately, nor was it always sold to the right people. If you look at the FSA’s evidence to this Commission, some banks were incentivising their staff to sell it to over 50% of people who took out loans, which I would argue cannot possibly have been the right proportion.

There are interest rate swaps, which we talked about earlier. Again, derivative-based products might be appropriate and suitable for a proportion of any market, but probably not widespread for a fish and chip shop. What happened in PPI is not, unfortunately, that uncommon-the idea of taking a product that is suitable for one market and pushing it more widely into markets it is really not suitable for.

Q701 Lord Turnbull: The irony of all this, it seems to us, from what we have learned from the Competition Commission, is that banks are now paying back billions more than the benefit that they got. It comes about because they charged for a product way in excess of the cost of capital and used a large part of that-£1.2 billion was the Competition Commission’s figure for 2006-to subsidise loans and sold them at a loss. So the detriment to the consumer is actually in the hundreds of millions.

What I think has happened is, because they hung on to this product for so long, they are being asked to repay the mis-selling bit of it, because they cannot go to the customer and say, "Okay, I’ll give you that back, if you give me back the subsidy on the loan." So by their idiocy, I think the banking sector has ended up with a bill that is massively bigger than would have been the case if they had tackled this earlier.

Natalie Ceeney: It is certainly true that if they had tackled this earlier, the bill would be far lower-without doubt. One of the disappointing factors for us is that this has felt like a long period of prevarication of trying to see if this could be kicked into the long grass and maybe it might go away. Unfortunately, as time will now tell, there is a big bill that is being repaid. But even the redress so far, which totals over £12 billion, doesn’t come anywhere near the profits that were made off PPI.

Q702 Lord Turnbull: No, but it is maybe more than they get from detriment.

I have one other thing. In this thing on interest rate swaps, it says, "Where redress is due, businesses will be put back into the position they should have been without the mis-sale." That is not the same as being put back into the position as if you had never gone into the bank in the first place. That is the risk that I think banks are running: they are asked to put you back into the position you would have been in had you taken out the loan but not had the interest rate thing on top. By cross-selling, they run the risk that they end up refunding the detriment of the bit they add on, but do not recover the benefit that they gave away in selling the initial product. It seems that with the interest rate swap, exactly the same thing is going to happen to the banks as is happening in this case.

Tony Boorman: I suspect that our friends at the OFT would agree with much of your analysis of the dangers of cross-subsidising in the banking market. A lot of retail banking, as banks themselves would say, has been based on a pricing model. Banks would typically start with free banking, as they describe it, would they not? That perhaps rather encourages the sort of problems that you are describing.

Q703 Lord Turnbull: On retrospection, do you feel some sympathy for banks when they say, "You have now decided that this was not a good way to sell these products, and that from now on, the rules have changed-we have now got to do x, y and z. But what you are actually doing in this case is asking us not simply to correct something from now on, but to go back a decade or more and pretend that we have been operating under those rules all the way through."

Natalie Ceeney: Okay, I am going to say no, because that is just factually not true. The banks’ public reason for taking the case to the High Court, when they judicially reviewed ourselves and the FSA, was on that issue. The High Court found absolutely against the banks and in favour of the FSA and the ombudsman on all counts. I can categorically say that the ombudsman’s approach to resolving cases has not changed throughout the whole period we have considered PPI complaints. Actually, if you look at the FSA’s approach, that hasn’t changed either. It is based on principles of treating customers fairly. The rules that the FSA has had after 2005 pretty much mirror the voluntary rules pre-2005. Nothing has changed.

Lord Turnbull: Okay. That is what I expected you to say.

Natalie Ceeney: The High Court case did find that to be true.

Tony Boorman: If I may gently say, I think that it is slightly disappointing that a number of the institutions that have come in to speak to you have repeated a set of arguments that they practised at length in front of a judicial review in the High Court two years ago, which were overturned very clearly at that point.

Q704 Mr McFadden: Such as?

Tony Boorman: Such as this point about retrospection. Such as the argument that these are new or novel rules. Such as arguments that this has all come as a surprise. Such as arguments that our position has changed, or that the world came as a surprise. All these points were raised during the judicial review in the banks’ defence of the position that they wished to adopt against the stance that we and the FSA took, and the court was very clear in its findings.

Q705 Chair: On the judicial review, maybe you could elaborate on why it was taken-was it necessary? Did it just drag it out for you and others? Did it put you in a difficult position, because to me there seems to be a bit of a David and Goliath element, in terms of resources? When the FSA took enforcement action against four companies, three paid up, but the one that didn’t was Lloyds, which kept it going-Clive Briault admitted that to us. However, the three that settled were minnows, so there is a resource element here. Could you give us more of a feel about the judicial review and those issues?

Natalie Ceeney: I joined the Financial Ombudsman Service in early 2010. At the point I joined, we were having frank face-to-face conversations with the retail chief execs of the banks on a very, very frequent basis, because the complaint volumes that we were seeing on PPI were very high. We absolutely knew what our views were on how to deal with complaints, and I knew what the banks’ position was. It seemed clear to me that the banks’ position was, "If you keep going like this, ombudsman, and if the FSA sticks to their guidance, this is just going to cost us too much money." That felt very clear and was very overt. When the judicial review came, to be honest it did not feel like a surprise, because so much money was at stake. I suppose one argument is that if the banks are looking at a potential bill of £12 billion, which is what is now set side for redress, throwing a few million at some lawyers is quite economically rational. I must admit that that was the interpretation that I personally put on the judicial review. It was an economic decision to try to stave off a big bill.

There was a big impact for customers. So, at the time-before the judicial review-we were receiving around 1,500 complaints a week. Most of the banks at that point were simply saying no to every complaint that came, so we were the body having to deal with all of that.

At the point of starting the judicial review, virtually all of the banks involved simply said, "We’re not going to deal with complaints." So customers started getting letters simply saying, "Go away." The banks, via the BBA, asked us formally, and then asked the FSA to ask us formally, to stop handling complaints, which we refused to do. And our view was that if customers just couldn’t have their complaints heard for a few years, I could see why that might help the banks kick it into the long grass but actually it was the worst possible answer for customers.

We were then told by the BBA that any case we tried to resolve in the judicial review period we would be individually judicially reviewed on. Essentially, that meant half of my work force who were dealing with PPI complaint support at that time had their salaries but they could not do an awful lot of work, because we couldn’t actually finalise cases.

So we were doing a lot of investigative work; most of the banks refused to send us case files over that period, as well. So, essentially there was a period where it all ground to a halt, despite the fact I had a lot of staff trying very hard to resolve cases. We did fear at one point that the judicial review would go on for years. Thankfully, it didn’t. So, thankfully, it got resolved, as I said, when the High Court ruled unanimously-well, completely on all counts-in our favour and the FSA’s favour.

At that point, though, there was a massive backlog of complaints that had been waiting, in both the banks and the ombudsman’s service. The publicity had meant that even more people were aware, and unfortunately the lack of trust in banks that the whole episode had fuelled then fuelled the claims management industry, which piled in, saying, "You obviously can’t trust the banks, here’s us." So it left us in a much bigger mess than before.

Q706 Chair: So, in a sense, what you are saying to me is that with the resources that the banks had that they were either trying to put you out of business or paralysing your organisation. You must have felt pretty uncertain and threatened in your organisation, if there was going to be an approach of just doing it individually, because you couldn’t have dealt with it.

Natalie Ceeney: One good thing about the ombudsman is that we feel that right and justice are on our side, and we are fairly resilient. So, we were very confident that what we had been doing for the last decade had been right. So, yes, it did feel a little bit like David and Goliath, but we were confident that we had the law behind us, our approach was right and that, in the end, is what the High Court found.

Q707 Chair: Yes, but as an organisation you must have thought, "What about our resources here? What is going to happen to them?" Is that correct?

Natalie Ceeney: It certainly was challenging, and we ended up having to go back to the whole financial services industry to raise an additional £25 million of reserves because we were so exposed, which unfortunately therefore became a bill for the whole of the sector and not just the individual banks.

Q708 Chair: Can I ask something? In an earlier question, it was said that there are around 5 million PPI complaints, but 50 million policies have been sold, you said. Do you think now is the time to take stock and ask the FSA to take a different approach to past business? At the moment, the FSA is being lobbied by the banks, which are saying, "Look, let’s draw a line under this next year on it." But if the FSA does that, it seems to me-looking at it from the sidelines-that if customers haven’t been informed whether the three-year rule applies, the first action of the new Financial Conduct Authority could be one that is to consumers’ detriment, if there is a cut-off next year. So, those two points about the 50 million policies and the FSA undertaking the past business review, and the other point.

Natalie Ceeney: As you say, the BBA has now publicly told everyone that it is lobbying the FSA for a time bar. I think what is helpful is that the FSA board has made a statement that it will only introduce a time bar if it is in the consumer interest, which I think is a very important statement.

The decision on a time bar, or not, is up to the FSA and not us. There are a few things that I think are important for the FSA to think through, and we have absolutely said this to the FSA. The first thing that I would say is that I think one of the myths around at the moment is that there are no time limits; of course there are. There are current time limits, which are three years from the point you are individually aware that there is a problem, or six years from the sale.

As you have said, there are some challenges particularly with PPI, because of the level of assumptive selling. Everybody in the UK might be aware that there is this thing called PPI, but would you individually necessarily know that you were sold PPI? You may or may not know-in fact, we have come across a lot of people who did not, because of the way that it was sold. That’s the first thing.

So there are already time limits. One of the first questions that needs to be asked is why are those current limits inadequate? Bringing in a new time limit would suggest that they are, but they seem to work for everything else. The second question, I think, is whether or not the endowment experience actually offers a helpful precedent. You will remember that, in mortgage endowments, a time limit was brought in; it was actually brought in to extend consumer rights, not to limit them. To go back to my assumptive selling point in a way, in mortgage endowments, importantly, every customer was written to a number of times. That took it from a general issue about there being mis-selling of mortgage endowments down to the individual level of each consumer knowing where they stood.

At the moment in PPI, we are a long way from each consumer knowing where they stand. If a time bar is brought in, there will certainly be a challenge about how we deal with the issue of people being aware of PPI but not necessarily being aware of where they stand individually. With a time bar, what tends to happen is that it is the ombudsman service that has to work out the rules and implement them. Without that clarity, it would certainly be pretty challenging.

Q709 Lord Turnbull: Could it be that the banks do not know how lucky they are? The remedy could have been, as it was with endowment policies, that they had to go back over all 50 million, whereas in fact they have been asked to respond to all claims. I am not sure, if I were them, that I would kick this hornets’ nest; I would settle on where we are now, because they could end up somewhere much worse-they could be told to look at the remaining 45 million who haven’t yet complained.

Natalie Ceeney: Yes.

Q710 Mr Love: I am sorry if I am covering some of the ground that we missed when we were out voting, but I want to get your perspective and experience on mis-selling. The first issue is, to what extent you think sales incentives were a cause of mis-selling?

Tony Boorman: That’s difficult for us to tell. We do not make studies of what rewards staff get. I think we are back to the point about culture, as well as the point about direct reward. From a lot of the evidence that we have from firms about their sales practices, it is very clear that they were actively encouraging sales practices that I think anyone would say were questionable if they looked at them. It is difficult for me to tell whether that was for the commercial benefit of the bank in terms of its profitability or simply for the benefit, from commission, of the front-line staff in the call centre or in the bank. But there certainly were a set of arrangements and very active processes in many institutions that we have seen-not all, and one of the things that we have not perhaps brought out, which we should, is that these institutions do differ-to encourage sales practices that were not satisfactory. We employ a lot of staff who used to work in the industry, as well as staff who used to work elsewhere, and they can certainly remember the degree of encouragement and reward that there was during much of the past decade for sales of these sorts of products, particularly PPI in the retail market.

Q711 Mr Love: I’ll come to encouragement in a moment; I like the use of that word. Let me just ask you about a specific example, which is Lloyd’s Banking Group. We looked carefully at what had happened there, as they are the largest seller of PPI. They said that they never used any targets for sales of individual products. Would that be the case in your experience for PPI?

Tony Boorman: If that is what they said, I am sure it is true. I would simply say that I am not aware of any bank that did not encourage their staff-this is how they might portray it-to get customers to think very seriously about the purchase of this product.

Q712 Mr Love: To some extent we have focused on a financial incentive, but when the trade unions came before us, they talked about management encouragement, if I can use that word: there was a culture that stressed the importance of selling this product regardless of the financial incentives, and consequences for those who did not sell the products. Did that feature in your inquiries?

Natalie Ceeney: As Tony said, all we do is look at individual cases, but in some of those individual cases we see a sales script. In fact, if you look at some of what is on our website or the evidence we gave to the High Court when we were judicially reviewed by the BBA, we have sales scripts where "encouragement" is a very, very mild term for what happened. A consumer would say, "I really don’t want PPI," but the reply would be, "I’m sure you do. It’s really in your interest," and that would go on four or five times. We have heard some scripts where "pushy" is mild as a description of the sales approach.

Q713 Mr Love: The FSA has just published its policy statement. I’m just looking for the title. It’s "Risks to customers from financial incentives". That’s like a rerun of all the problems that were thrown up by PPI. Are we learning the lessons of PPI for the future, because it looks as though organisations are still making the same mistakes?

Natalie Ceeney: It’s quite hard for us to give a view on that, because the ombudsman is always going to be behind the curve-we always see problems that have occurred in the past-but I am not seeing a marked decline in problems across other areas of our work. Although we are receiving a very high number of PPI complaints, we’re receiving a high number of complaints across just about everything. We are seeing problems with bundling of products, not just in relation to PPI, but with all types of add-on products. We are seeing products sold to a market when it was not designed for them. We see these widespread problems, across a lot of institutions, a lot. As we said earlier, not all institutions are the same. Practice does vary, and it varies over time as well as by institution, but we still see a lot of problems.

Q714 Mr Love: I notice that the fines that you can impose have just been increased, from £100,000-

Natalie Ceeney: That’s not us; that’s the regulator.

Tony Boorman: We wouldn’t describe them as a fine. We would describe them as compensation that the customer is due, and indeed that has increased from £100,000 to £150,000.

Q715 Mr Love: £100,000 to £150,000. I just wondered whether you felt that a larger step was required or whether the real solution here lies-we all understand it does lie with the banks, but how would you describe the way banks need to change in order to address these shortcomings?

Natalie Ceeney: We’re not a regulator, so I can only say what I see; it may be giving a different lens on it. I’m a chief exec myself, not of an institution the size of Lloyds Banking Group, but I’ve got 3,000 staff, and one thing that I take seriously as a chief exec is making sure that our organisational values and ethics pervade everything we do. For me, that means aligning the incentive scheme with what matters round here-making sure you encourage the right behaviour, making sure the right behaviour is rewarded and making sure you have controls so that if things go wrong, the board and governance systems pick it up very quickly. That just feels to me to be common sense about the way you run an institution well. I look at some of the things that have gone wrong and I question why incentive schemes, for example, were there that clearly did not align with the rhetoric coming out at the top. Making sure that strong values and ethics really do pervade everything that is done, so that big mistakes cannot happen, would strike me as just core to the way any institution should run itself.

Q716 Mr Love: Finally, we’ve talked about interest rate swaps. What other products are causing you problems at this particular point in time? The talk is, of course, of packaged accounts. Bringing different products together in packages of that nature seems to me to be likely to create all the same problems that we have had with PPI. Is cross-subsidisation the real problem here?

Natalie Ceeney: I think there are three categories. I don’t necessarily know enough about the underlying economics to know whether it’s cross-subsidisation, but there is certainly an issue. The first one I would flag is bundling. An issue slightly away from banks, for example, is mobile phone insurance. Everyone has bought a mobile phone. The ancillary sale of insurance is an issue that worries us. We only saw 600 complaints about it last year, but it is worrying us, because we know what is happening is wrong, and we are finding against those institutions that have made those sales most of the times when we see those complaints. That probably fits in the category of an early warning signal.

We have certainly been seeing problems with packaged bank accounts for many years, for similar reasons. Someone might buy one, but when they look at the details a lot of the home insurance does not cover them, and there are exclusions which mean that they are not covered in many ways. That is why many banks now, with the FSA’s encouragement, are looking at how to sell them more clearly.

Products suitable for one market and being sold to other markets is still an issue, and we are still dealing with complaints about complex investment products sold in retail bank branches to non-sophisticated customers. We see that across a lot of areas of our work.

A final category, which is generic, but again we see it a lot, is when a description sounds very attractive but the underlying product simply does not deliver. For example, we have seen in recent years problems with mortgage products when the headline for the customer is, "Don’t worry, this rate is capped at 2%", and the small print says, "Unless we decide to vary it." That happens. An insurance product may be sold saying, "Don’t worry, we cover you for anything that happens on your ski trip", but the exclusions include many things that are not covered. Those are quite generic issues, but it is important to look at them because new products come up and the same issues can crop up again and again.

Q717 Mr Love: Just mentioning the first of those-bundling. Many people have told us, and we have received evidence suggesting, that greater transparency and trying to make a more level playing field between those who are selling and those who are being sold to would address the problem. Others suggest that free-in-credit banking is the essence of the problem because that is effectively a subsidised product so other products have to be sold. What does your experience tell you?

Natalie Ceeney: I think the economic question is best left to the OFT and the Competition Commission. Certainly on the bundling it is critical that the benefits and disbenefits are explained with the product. If the customer does not know what they are buying, there is a problem down the road when it becomes a big scandal because many consumers say, "You sold me something I didn’t need." It is essential that consumers know what they are buying.

Q718 Chair: On the point that Andy makes about incentive schemes and appropriate incentive schemes, when we questioned RBS executives, one of them, Paul Geddes, said there was a real risk with incentive schemes that gave double sales points for selling a loan with PPI or more points for bigger loans. But Gordon Pell-I think he was in charge of retail-said he didn’t sign off the scheme and was not aware that there were double points for PPI. Can you believe that someone at senior level and board level did not understand what the sales procedure was?

Natalie Ceeney: Personally I have never run a bank, so I honestly do not know the answer to that.

Q719 Chair: No. Okay. We are looking here at the control function in banks. If the senior executives do not know, there could be mayhem at front-line level.

Natalie Ceeney: Let me answer in a different way. I can personally tell you that I know chapter and verse of my staff incentive scheme because one of the points about such schemes is re-incentivising behaviour. It is one of your best management tools for your staff. So if you do not know what is in it, I would find that slightly incredible or you are missing a big trick of how to manage your staff. It is certainly something, I promise you, I know backwards.

I think it comes back in a way to what the culture needs to be to run any institution. I have been a chief executive for around eight years. I have certainly always had the view that the buck stops at the top and that it is the chief exec’s job to put systems, procedures, controls and incentives in place that mean that what you believe matters happens the whole way down, because the chance of a chief exec knowing everything that happens everywhere and with everyone in your institution is zero. You can’t. But that does not mean you can abdicate responsibility for it. Responsibility absolutely stops with the chief exec. I personally never respect a chief exec who says, "My defence is I didn’t know."

Q720 Chair: Lord Turnbull has spoken about the different types of products with 80% or 70% profit return on them. In fact, I was on a panel with the present chairman of Lloyds, and he said that if they are making a profit of 80% or 70% it is obvious that the market does not work and someone should have woken up to that long ago. Do you have any information about the sales process and how these products were approved? I think it is something the Commission would be asking the banks for. How were those products approved? Do you have any information on that?

Natalie Ceeney: That is not our remit. What we do know is what happened in the sales in practice from the testimony we have and what we have seen the banks provide through calls. We do not get involved in what happens to get the sales to that point, but we certainly have evidence-it is on our website and very much in the public domain-about what happened in individual sales.

Q721 Chair: Good-that is fine. In terms of individual accountability and the control system, is there anything that we can learn from legislation on the statute book at the moment? Could any legislation be refined so that individuals become aware? We have been frustrated throughout this inquiry by chief execs and chairmen coming to us and saying, "See no evil, hear no evil." We had a row of UBS executives and, while their combined salary was $100 million for the year, they did not know anything about their star trader who screwed the company-

Natalie Ceeney: We are very cheap in comparison.

Q722 Chair: Is there anything in legislation that we should look at, such as corporate manslaughter and so on?

Natalie Ceeney: I saw Tracey McDermott’s evidence before the Commission and I know how hard the FSA have found it to pin people down. I would come back a bit; as a chief exec myself, the buck stops with me. To use your example of corporate manslaughter, certainly when I first became chief exec I thought, "Gosh, if anything happens in my institution and anyone were to suffer such detriment to their health, I would be liable." That made me take health and safety extremely seriously. Anything that reinforces the fact that, when you are at the top, you are accountable for everything that happens, feels to me to be common sense.

Q723 Chair: I did give my experience of when I went for a loan at Barclays bank. It was a small loan, but I was asked to take PPI. As a Member of Parliament, you don’t need it because you are in there, whether you turn up or not, for five years. Notwithstanding that-by the way, I turned up every day-I got eight subsequent letters from Barclays, which showed how much folly this issue was. It is important for us to try to get some recommendations that state that the corporation, the entity and those at the top have to know what is happening. Anything that you could help us with in that area would be very helpful.

Natalie Ceeney: I think a lot has changed since 2005. One thing that we have focused on, which I hope will help here, is simply putting more information into the public domain, because I think that it is critical that boards of any organisation-including the ombudsman, but certainly banks-are really aware of what is being said. Something that we are quite pleased about in the legislation that has gone through Parliament and will be enacted quickly is that we are now obliged to publish our ombudsman decisions, so it will be harder and harder for anyone to say that they did not know because it will all be out there in the public domain. Our complaint data are already out there.

It is already quite hard for the board of any financial institution to say that they did not know that the ombudsman had a problem because we do; Tony and I routinely meet with the heads of all the major institutions in Britain and, certainly, if anyone has a problem, in our eyes, we are there talking to them. We already do quite a lot to try to move this up people’s agendas. You can only take a horse to water-if they do not want to listen, there is only so far that you can go.

Q724 Chair: I understand. I am looking at the new problems and I think that Andy asked you about your concerns. The publication of FOS uphold rates, where the FOS has disagreed with a bank’s handling of a complaint, has had some success in holding the banks to account. We know that banks are keen to keep their complaint levels low, but banks do not have to publish complaints that are closed down by the next business day. Do you think that that is a flaw?

Natalie Ceeney: No, I do not. One of the issues with complaints is that, just as a lot of complaints is a bad idea, no complaints is wrong, too. That should send alarm bells because complaints are a fantastic source of insight; if I were running a marketing department, I would want complaints because they would tell me where I can improve my product. One of my frustrations with some financial service institutions is that they simply do not understand that.

When I go to meet the chief exec of a financial institution, I can largely characterise how they think about customers by how they organise their complaint department. If they have their complaint department as an insight function, with a close link with marketing, I think that that is great; they are learning from customer experience and will use that to improve. When they tell me that they have a compliance department of 5,000 people in a warehouse somewhere off the M25, alarm bells go off, because that says to me that they see it as a tick-box exercise and they are not going to learn.

One of the worries about complaints is that, as the issue gets more public prominence, we are all getting into a counting game. Actually, the issue is not all about a counting game; it is about listening. Personally, I don’t really care how they are counted. What I care about is whether customers are listened to.

So I do worry if there are large amounts of complaints. I probably worry more about the uphold rate-the win-lose rate-than I do about absolute volumes, because sometimes more people telling you things have gone wrong gives you a chance to improve. If you are listening, that is really good.

Q725 Chair: In terms of complaints information, do you think too much complaints information is published? Should you not just be publishing uphold rates?

Natalie Ceeney: I think, in today’s internet world, anything we do not publish, people think is a secret and they try and drag out of us, and then it’s a scoop. We take the view, as a transparent, evidence-based organisation, that the safest possible thing we can do is just tell everybody what we do, and what other people want to do with it is up to them. We pretty much put out all the data we have. We think it is important to publish more. What people want to do with it is up to them. I do not think in today’s world that it is helpful to hide.

Q726 Chair: The Competition Commission said that banks, on request from individuals, should let those individuals know what the PPI claims ratios were. Do you have any idea why they did not just require banks to publish those, as they are required to for complaints?

Tony Boorman: I am not sure why the Competition Commission made those findings and why it took the steps that it did. Claims ratios are quite a helpful piece of information for customers. It is part of the evaluation of the product. One of the interesting things that the critical illness part of the insurance industry has done is go through a process of building confidence in customers by explaining the claims ratios that they have, explaining the proportion of cases that are upheld, working with organisations-including ourselves, and also trade associations and customer bodies-to understand why in some cases they are turning claims down, and feeding that information back into the front of their process. It is not just about complaints. Understanding complaints and getting feedback from that is important, but it is about getting a thoughtful understanding about the way in which the product interacts with the customer-what goes well, but also what goes badly.

As a personal observation, in a lot of these areas, there is too much of a good news environment-a good news environment within the institution about how well things are going, and a good news environment with the customer about all the things that they will benefit from. We are all more cynical, or more mature-whichever way you like to look at it-and we all like to know the upside and the downside of what we are being offered. We certainly encourage banks, insurers and other financial institutions to explain, yes, of course the benefits, but yes, of course, the downsides as well.

Q727 Chair: When Clive Maxwell from the OFT was before us yesterday, he said that the more consumers know about the quality of the product, the more the market can work well, so that is consistent with what you are saying. Have you any other ideas from your view of the PPI-other than complaints-about the sorts of information that could be published that would make it easier for consumers and consumer groups to use to hold banks to more account for their actions?

Tony Boorman: One of my answers to the question is that information is certainly important, and clarity of communication. We all know that we can give people too much information, but it is important that exactly what you want is there. One of the issues that arises out of the PPI story is a process that makes products ever more complicated. One of the things that I find always makes for a sale environment that is going to work for the customer, and hopefully for the business as well, is a product that is simple and designed to be simple to explain, rather than one that has, proverbially, all the knobs and bolt-on pieces.

Natalie was describing travel insurance earlier. That is a classic example of a product that over the years has accreted various components of cover, which makes understanding what you are buying almost impossible for the customer, and frankly, often makes it difficult for the person who is selling it to explain it, and how it works for you. Having simple, straightforward products with clear information-nothing very novel, I am afraid, in that suggestion-is, as always, the thing that I think makes the market work well.

Q728 Chair: In 2005, on the Treasury Committee, when I chaired it, we were looking at financial services and the insurance industry in particular.

I cannot remember the title of the document we produced-about reforming financial services-but we suggested that a retail forum should be established, where you have industry and consumer groups together with products, so that you get simplification of language and understand what is on the tin. For the industry and consumers, that would be a win-win situation. For consumers it would be simple. Industry can say, "Look, that was on the tin. That was very clear." That could eliminate mis-selling claims further down the line. Is there some room for initiatives like that?

Natalie Ceeney: I think anything that does what it says on the tin and simplifies language has to be a good thing. We see so many problems arising over the description and the contents not aligning.

Tony Boorman: If I can build on that. One thing that I hope comes out of this sorry story is a closer relationship between financial institutions and customers. One thing we found difficult over the past few years has been getting customers and financial institutions in the same room and getting them to speak politely to each other. That has not always proved as easy as one would like. They ought to. If I can be so bold as to make a broad point: society needs banks and customers to talk to each other and move on from some of the problems of the past.

Q729 Chair: You were at a meeting that I was asked to chair between consumers and industry about six months ago, Natalie. What surprised me about that meeting was the depth of ignorance that existed about an agenda on what the financial services industry could do. It does not seem there is much innovative thinking in areas like that yet.

Natalie Ceeney: The meeting you were asked to chair was particularly about PPI, so I think you saw some of the behaviours we are now talking about.

Chair: Yes, I did.

Natalie Ceeney: There were a lot of people playing particular roles, given the politics of the situation.

Q730 Chair: Exactly. We are interested in raising standards in banking. If we are going to give banks proper incentives to raise standards, then following mis-selling, we have to be clear about telling them that they will be required to compensate consumers. I think that was what was missing in this long dragged-out process here.

Angela Knight said to us that she did not support the judicial review, but it was supported by BBA members. She subsequently sent us a letter that we will share with you. You had high uphold rates that persisted for several years after the problems were highlighted-you’re telling us way back to the ’90s. Is there not a case for a new form of collective redress, given the need to raise standards, but also given that an organisation such as yours was threatened with individual cases? If there is collective redress, would that not sharpen the minds of the banks?

Natalie Ceeney: The FCA to be, and the FSA for the past couple of years, has that power. There was a power to do that even as early as 2008, which was essentially what we were calling for. The issue is that it has not been widely used. For example, the FSA has a power called section 404 of the Financial Services and Markets Act that allows it to create an industry-wide scheme to give compensation to a large group of customers. That power was strengthened two years ago, as I mentioned.

There are, in our view, instances where that is absolutely appropriate. We can deal with individual cases. If you know something has gone wrong en masse, for the regulator to take a view that sometimes it is appropriate to ask the banks to compensate people en masse, feels absolutely right. Our view would be that we need that broader view of what enforcement means. Sometimes for the ombudsman to deal with every individual case individually is right; sometimes perhaps compensation is better. As we said very publicly in 2008 in our chairman’s letter to the FSA, in our view that would have been the right answer on PPI.

Q731 Chair: Should the FSA use section 404 on PPI?

Natalie Ceeney: I think it is now too late, to be honest. We now have tens of millions of customers out there who are in the complaints machinery. I think it is probably too late to turn the clock back and go back and proactively compensate customers. To go back to Lord Turnbull’s earlier point, it is a bit of an opportunity missed.

Q732 Chair: Another area that we are looking at is professional standards and a professional body, and we are giving thought to an independent body. Some of the comments that have been made to us reinforce the case for that. For example, Gordon Pell said to us, "I emphasise the joint responsibility of ourselves and the regulator." In other words, what the regulator said went. It was a box-ticking exercise, so there did not seem to be individual responsibility or a culture of customer care. Clive Briault has said that the industry kept fighting against treating customers fairly, principle 6 or 7, and that was a lot of the problem that resulted.

Helen Weir from Lloyds said that, with the introduction of ICOB and ICOBS, "the industry believed that those substantially represented-not fully represented, because the principles were there-what compliance with the principles would mean." She said that the example with regard to early repayment of a loan and flexibility-the single premium-was not something that they had considered and was not something that they flagged up earlier either in conversations they had with the FSA or in ICOBS. It was actually raised by the Treasury Committee in 2005. It is indicative of the fact that there seems to be a vacuum somewhere, when senior executives do not have that. If we had a professional standards body, would that assist in that process? In other words, would it help change the culture? There is a cultural deficiency here.

Natalie Ceeney: How you change a culture is a long debate. I am just reacting to some of the quotes you have read, because we are finding it slightly implausible that such senior people can deny knowledge of things that we had personally pointed out to them.

Chair: Lord Turnbull did, actually. What was the word he used yesterday with Sir John Sunderland about PPI-rubbish?

Lord Turnbull: He described it as a problem from the distant past.

Tony Boorman: One of the unattractive bits, and I use the word deliberately, is an industry that describes itself as waiting for the regulator to tell it that it cannot do things, and for that to delineate what is good and what is not good. I have the joy of dealing with teenage children, and I seldom think that setting out detailed rules about what they can and cannot do when they go into town is wise, but some broad principles of my expectations might be helpful and, I hope, inform their conduct. The notion that one can set out rules for a whole set of events that one has not observed and cannot oversee and to place a burden on a regulatory body to do that is logically, practically and culturally unattractive. That is one of the fundamental changes that seems to be required.

Q733 Mr Love: As I understand it, in the Financial Services Act 2012 there is power to take a super-complaint. You have no doubt had a little time to think about circumstances in which you would use that. First, how do you see that operating for FOB? Would it have helped in the case of PPI?

Natalie Ceeney: We are very supportive of the power generally. As you will know, consumer credit and other aspects of consumer law have had a super-complaint power, but not this aspect of financial services. I do not think we can see many scenarios where we would use it, because in a way we would hope that we would have a good enough relationship with the regulator that if we saw a problem we would shout.

Q734 Mr Love: So just having it there would be a pressure on-

Natalie Ceeney: We hope. In many ways, what we did with our letter in 2008 under the then wider implications procedure was the equivalent. Only history will judge whether you think that had effect. For us as a body publicly to say, "We want to raise something in a super-complaint" is possibly quite a nuclear option, so it is not something we particularly lobbied to have.

Q735 Mr Love: So your scenario would be that you would go to the FCA and say, "We are seriously thinking about this" in order to arrest their attention?

Natalie Ceeney: There are other obligations on us already to share important information with the regulator. We share all our complaint data, publicly and with the regulator. If we do see specific issues with individual firms, we will of course tell the business, but we will also tell the regulator. There is also already a mechanism with us, the regulator and the OFT to have a body that meets quarterly called the co-ordination committee, which Tony sits on, where we flag things, again in the public domain, that we are starting to have emerging worries about. We therefore feel confident that there are already mechanisms for us to say that we think there is an emerging problem, which we do use.

Q736 Mr Love: Which brings me on the general point about whether there are any glaring issues or powers that we could consider for the Financial Ombudsman Service that would have allowed you really to have had a greater impact on things such as PPI and other mis-selling scandals.

Natalie Ceeney: No, in a way we feel that the ombudsman has the powers it needs. The important bit is that we are only part of the machinery. We cannot act alone. If we see the same thing happening again and again and again, we are dependent on the regulator to take action. In a way, they, as Martin Wheatley said in his evidence, know that they did not act quickly enough on PPI. The bit that we need most is a power for an effective regulator. The other bit that we need is an industry that does not wait for detailed rules, but behaves ethically in the first place.

Q737 Mr Love: So if we were to highlight the need for greater consultation and discussion, a forum, as John mentioned earlier, would be a sensible response to what you are saying to us?

Natalie Ceeney: I cannot see that dialogue would do any harm, so that seems very sensible.

Q738 Chair: Thanks very much. Maybe I can end with a piece of good news for you. I received an e-mail at 12.59 pm-one minute before I came in here-from the director of group public affairs at Lloyds, saying: "Dear John, I am writing to you following the FSA’s announcement today on the sale of interest-rate hedging products to small businesses. Ever since the FSA launched its review, we have engaged fully with them to develop an approach that will deliver a fair and consistent outcome for business customers, but I want to assure you that we are committed to doing the right thing by our customers, which means, following the review, we will provide redress as quickly as possible to those small business customers where detriment is identified. In particular, we want to reassure our small business customers, particularly those with less sophisticated businesses in the real economy, who have been affected, that we will provide redress in as short a time frame as possible." So maybe, Ms Ceeney, you will be out of a job soon.

Natalie Ceeney: That would be lovely.

Chair: Thank you very much. That was excellent.