Session 2012-13
Panel on mis-selling and cross-selling
Written evidence from Lloyds Banking Group (SJ 004)
Introduction
Thank you for your letter dated 30 November 2012 requesting information principally in relation to PPI. Lloyds Banking Group (LBG) notes that there are to be other requests in due course in relation to other products. LBG is pleased to provide information and is ready to assist in any way possible.
In the limited time allotted by the Commission for the bank to respond, we have focussed on the areas where records are most readily accessible. This response therefore focuses primarily on the single premium PPI product that was sold face to face in Lloyds TSB (LTSB) branches to customers taking out an unsecured personal loans for the period 2005-2010 (LBG stopped selling PPI in 2010).
Preliminary Points
Before turning to address the specific questions, we have a few preliminary observations:
Firstly, we acknowledge that there was mis-selling of PPI across the industry. We sincerely regret our part in that and apologise. LBG is committed to doing the right thing by its customers and that is why, in May 2011, the new management at LBG supported by the Board made the decision to withdraw from the Judicial Review challenge brought by the British Bankers Association ( BBA ) , on behalf of the industry, against what the industry believed was the creation, and the retrospective application, of new requirements by the FSA. This was a genuine misunderstanding between the industry and the regulators on the standards to be applied to complaints about PPI sales.
In the view of LBG’s new management, the judgment was clear: whatever detailed rules the FSA had put in place over the previous years, compliance with these was necessary but not sufficient to meet the banks’ duty towards their customers. LBG was the first bank to make clear that it would implement the FSA’s changes for complaint handling. LBG’s decision led the industry to abandon plans to appeal the Judicial Review judgment.
LBG’s priority has been to provide redress to our customers who have been adversely affected by PPI mis-selling. We have so far set aside £5.2 billion for customer redress and the associated operational costs. The sums involved have been substantially larger than anyone, FSA included, thought at the time. LBG’s management has no regrets about making the decision to withdraw its support of the BBA’s Judicial Review, as we look to regain the trust of our customers and of the wider public.
Secondly, at all times, LTSB sought to comply with the regulatory requirements and to act fairly towards our customers. and did not believe it was mis-selling PPI policies to its customers. Like other banks, LTSB focused, particularly between 2005 and 2008 on the evolving regulatory rule-book and ensuring compliance with those rules. In so doing, it believed that it was meeting both the letter and spirit of the regulation and of the FSA Principles for Business and treating customers fairly.
Lessons Learned
LBG believes it is essential to learn from the PPI experience and to make meaningful and lasting changes that will benefit both firms and consumers.
Firstly, product design and governance: we now do more to simplify products and how they work. This requires careful product design, built around detailed research and analysis of customer needs. There is now a keen Conduct Risk focus from senior management and the Board across the Group , and particularly on any product whose profitability noticeably exceeds average returns.
Secondly, value for money and customer need: Our products represent value for money to customers and meet customers’ financial needs. We seek to make sure that customers are placed in a position where they can make a decision based on value and need. Many customers are not financially sophisticated and as an industry we need to ensure that customers have a better understanding of how products work, the value they represent and ensure our sales staff are trained to explain products simply and clearly.
Thirdly, incentives: almost all retailers have an incentive system for their staff, ideally designed to encourage staff to be alert to customers’ needs and adept at identifying genuine needs or wants that the customer may not find easy to articulate. We have made changes in our incentive schemes to place less emphasis on the volume of sales and greater emphasis on providing better customer service and experience.
Fourthly, a Supervisor with clearer objectives: We support the proposed changes and the introduction of the Financial Conduct Authority (FCA) through the Financial Services Act and more certainty over its role and objectives. We hope that with clearer objectives the FCA will act effectively in the interests of customers but also wisely to provide the certainty the industry needs to serve its customers to best effect.
There have also been other important lessons learned from our experience with PPI including:
· the need for more detailed root cause analysis of customer complaints to help us detect issues earlier;
· the greater involvement of senior management in conduct risk issues and the management of those issues; and
· better sales outcome controls.
We have worked on these issues and continue to do so to ensure that the lessons have been learned and actions taken and changes embedded in the organisation. We set out below a few observations, with the benefit of hindsight, in relation to the PPI product, the PPI market, the regulation of PPI and the role of the Claims Management Companies (CMCs).
General Observations
The PPI product
PPI was first sold in or around 1984. It was never a standalone product. It was always sold with an underlying credit product. Inherently, it was a socially useful product: it insured mortgage-holders or loan/credit card debtors against major adverse life events: unemployment or ill-health. The risks that these life-events entailed were offset in specific insurance policies.
During the 2000s, and especially from 2003-2008, there was greater customer demand for credit, which led to a significant expansion of credit products. Alongside that expansion was a rapid growth in the sale of PPI products to insure the underlying risks. This period of increased PPI sales coincided with the increase in regulatory scrutiny and the introduction of specific rules to cover the selling of insurance products.
With the benefit of hindsight we believe that PPI products needed to be made:
· simpler in design and more customer focused (particularly for customers who already had PPI policies on pre-existing loans or credit)
· easier to understand by customers
· more straightforward to sell by sales colleagues.
The PPI market
It is relevant to note that in the period 2000-2010 the market for free standing protection products (i.e. stand alone products sold independently of the credit) was not developed. Customers therefore had to make a decision about whether to have:
(a) an unsecured personal loan on which they may have real difficulty in keeping up their monthly repayments in the event that they became sick, critically ill, unemployed or died; or
(b) a protected loan.
Customers had to make that decision at the time they took out the loan.
The Competition Commission investigated the PPI market and reported its original findings in 2009 on the structure of the market (rather than on the sales process). One of the outcomes was that the Competition Commission effectively banned the sale of PPI at the same point in time as the sale of the associated credit product. This has had the unintended consequence of PPI products being withdrawn and reducing consumer choice (at least in the short term) rather than increasing competition by creating a larger market for stand alone production products.
Our answer to Question 8 (below) sets out in more detail the "Protection Gap" and the need for protection products that are designed to meet the needs of customers. Our answer to Question 25 sets out details of our Essential Earnings Cover (EEC) product. This is not a replacement product for PPI. It is a standalone product and we believe it meets the needs of customers, is simple in its design and is easier to understand. We believe this reflects further the lessons learned from PPI.
The regulation of PPI
The approaches to regulation changed over the period 2005-2012. The FSA took over regulation of PPI in January 2005 and introduced the Insurance Conduct of Business (ICOB) handbook. This was the first (and at the time the FSA believed) comprehensive set of rules for PPI. ICOB contained a considerable number of new detailed and prescriptive rules and guidance that firms had to comply with (173 detailed rules, 2 evidential provisions and 222 guidance provisions). LTSB like other firms took a great deal of time and care to build systems and controls to ensure compliance with those requirements. At the time LTSB took the view that what was required was to comply with those detailed requirements and in doing so LTSB would be complying with the high level FSA Principles for Business, which were part of the FSA Handbook and required firms to treat their customers fairly (Principle 6).
After the introduction of the new regime in January 2005, the FSA conducted a thematic review involving mystery shopping exercises and supervision visits. Following its review, in November 2005, the FSA identified a number of key issues regarding PPI sales and, in general terms, concluded that the sale of PPI policies posed a risk to the FSA’s consumer protection objective. Less than a year later, the FSA conducted a second thematic review and published a second thematic report (in October 2006). As a result of that work, the FSA implemented a revised set of requirements which came into effect in January 2008 (though firms had 6 months to comply with them). The FSA expressly stated that the changes made were to address "certain market failures we have identified". [1]
We took care to ensure that we complied with those revised prescriptive requirements and the messages in the FSA’s thematic reviews. We believed that compliance with these rules was compliance with the underlying FSA Principles for Business.
As explained in more detail below, after 2008 the FSA’s approach to the sale of PPI changed following discussions and interactions with the Financial Ombudsman Service (FOS). These views were reflected in a set of "open letter standards" that were promulgated by the FSA as standards that had to be observed by firms when handling PPI complaints.
There was genuine concern in the industry that it was unfair to introduce, via complaint handling guidance, requirements which the industry believed were inconsistent with the detailed sections of the FSA’s rulebook. The industry regarded the proposals as amounting to retrospective regulation and it made the applicable standards for the sale of PPI products very uncertain. That disagreement gave rise to the Judicial Review challenge that was brought by the BBA against the FSA and the FOS .LBG ceased the sale of any PPI products in July 2010.
The role of the CMCs
In the context of making redress to customers, the increasing role of Claims Management Companies (CMCs) has created challenges for firms, for the FOS and for customers. There are concerns that the CMCs are not fulfilling their obligations to their clients and complying with their regulatory obligations, set by the Ministry of Justice. A significant proportion (around 45%) of the PPI complaints that LBG receives from CMCs are in respect of individuals who have never had PPI from LBG. This clogs up the redress system both for the banks and for the FOS. A number of CMCs will refer all rejected complaints to the FOS even though the complaint has been rejected because the customer never had a PPI policy with that specific bank.
CMCs typically take between 25% and 30% of any redress paid to individual consumers. The use by CMCs of ‘data-farmed’ lists of customers derived from cold-calling or spam-texting (an issue regulated by the Information Commissioner’s Office) means that many customers are signed up to the CMC unaware that they can bring a complaint directly to their bank and retain 100% of any redress made to them. The banks, the FOS and consumer organisations are working together to increase consumer awareness of this direct route.
CMCs are currently regulated by the Ministry of Justice (MoJ). We believe that there is an arguable case for dual regulation of CMCs by both the MoJ and the FCA to strengthen consumer protection.
Specific Questions
A. Chronology
1. A summary of the history of PPI sales at your bank from origination of the idea to now (including a tabular chronology of key events). Please specify key decisions that were made by; product development or product approval committees, risk or compliance committees, internal audit committees, complaints committees, Senior Executive committees, Board committees and the main Board. Please also specify the date of these meeting and the chair of the meeting.
Please refer to Annex 1 to this response, which is a table summarising the history of LTSB’s involvement in PPI sales in connection with sales of single premium Loan Protection Insurance (LPI) via the branch network (which was submitted to the Competition Commission in 2007). LBG has also provided an outline below.
Background
It should be borne in mind that LTSB was formed through the merger on 28 December 1995 of Lloyds Bank Group and TSB Group, and, in some cases, the merged group inherited different legacy PPI businesses from the two previous groups.
An outline of the history of the LTSB/Group's PPI activities is as follows:
Distribution activities
In summary, LTSB was, since at least the late 1980s/early 1990s, involved in the distribution of PPI largely through the Retail Bank and its Asset Finance Division.
Retail Bank
Companies which comprised the Retail Bank Division of LTSB offered PPI in connection with the supply of credit from 1987 until 2010.
In the early 1980's mortgage PPI was offered by Cheltenham & Gloucester, which joined LBG on 1 August 1995. Lloyds Bank itself distributed Lloyds branded mortgage PPI from the late 1980's. The TSB Group also offered mortgage PPI at the time of its merger with LBG in December 1995. Following the merger, Lloyds branded mortgage PPI products were re-branded as LTSB products.
Other Lloyds PPI products were offered by the Retail Bank division companies alongside secured and unsecured personal loans and credit cards since the 1990s. Products that had previously been branded as Lloyds or TSB products were replaced by LTSB branded products after the merger.
Asset Finance Division
Companies which comprised the Asset Finance Division of LTSB have offered PPI in connection with the supply of credit since 1987.
In the 1980s, such PPI products were offered, alongside the supply of credit, by both the Lloyds Bank Group, through Lloyds Bowmaker, and the TSB Group, through United Dominions Trust. Following the creation of LTSB in 1998 the businesses of Lloyds Bowmaker and United Dominions Trust were combined into Lloyds UDT.
In 2000, LTSB acquired Chartered Trust, which was already a distributor of PPI. In 2001, the business of Chartered Trust was merged into the business of Lloyds UDT, and the enlarged business was rebadged under the "Black Horse" name, to form the Asset Finance Division of LTSB.
Since the 1980s, the constituent businesses of the Asset Finance Division developed a wide range of credit products to individuals including unsecured personal loans; secured personal loans and loans to finance the acquisition of motor vehicles (e.g. through motor dealers and other similar outlets). The businesses offered PPI along with all these credit products.
Scottish Widows Bank
Scottish Widows Bank had an extremely limited involvement in the distribution of PPI. It commenced its distribution activities in 1997 by offering PPI to buyers of its own mortgage products. It ceased to distribute mortgage PPI in May 2006.
Scottish Widows plc
Scottish Widows plc provided the long-term insurance cover for PPI life risks since December 2006/January 2007. In its role, it acted as insurance provider for those long-term risks. The volume of PPI business written by Scottish Widows plc was extremely small. Different forms of policy were offered in connection with different loan products.
Key decisions
Many changes associated with PPI have been incremental as a result of the changing regulatory environment. Those changes and the corresponding decisions are identifiable in our responses to your specific questions below.
We set out below a high level summary of the key decisions that have been made in recent years:
· 2003 – Preparation for ICOB and decision to establish a structure to prepare for implementation;
· 2005 – Approval for sales of PPI under ICOB;
· 2008 – Approval for sales of PPI under ICOBS;
· December 2008 – Decision to stop selling single premium PPI policies;
· July 2010 – Decision to no longer sell PPI to personal or business customers;
· May 2011 – Decision to accept Judicial Review judgment; and
· May 2011 – Decision to take steps to redress mis-selling of PPI and establish a revised complaints handling procedure based on the new guidance/rules on complaint handling.
Refer to Annex 2 for a list of the key decision makers within LTSB.
2. An organogram outlining how the above referenced committees link to each other and link to the Board
PPI was considered by the Group Executive Committee (GEC) of LTSB and LBG at various occasions from 2008. The GEC consisted of the Group Chief Executive and the most senior executives in the Group.
The GEC reports to the Main Board and to the Main Board’s relevant Committees, notably the Audit Committee and the Board Risk Committee (formerly the Risk Oversight Committee).
Since 2011 there has also been the PPI Executive Board. The PPI Executive Board reports regularly to the GEC. Its focus has been primarily on the oversight of the Group’s remediation to customers and to review the work carried out on root cause analysis. An organogram is attached.
3. A summary of how your bank sourced the PPI product(s) it sold (for example, were they manufactured in-house, through a joint venture or via a third party?) and describe how this may have changed over time.
Since at least 2002, PPI products were, with two main exceptions, underwritten within LTSB, by Lloyds TSB General Insurance Limited (GI). LTSB’s General Insurance business unit (which encompasses GI) is separately managed, with its own finance (including actuarial), compliance and legal functions.
The Exceptions
a) Life Risks – GI is not authorised to underwrite life, long term disability and critical illness (life) business.
Prior to 2006, life risks associated with PPI were underwritten by external underwriters.
· The Retail Bank products were underwritten by the Financial Assurance Company up to December 2003, and then by Prudential Assurance to the end of 2006/early 2007.
· Asset Finance products were underwritten by the Financial Assurance Company up to August 2003 and by Prudential Assurance from March 2004 to the end of 2006/early 2007. Lloyds TSB Life Assurance (now Scottish Widows plc) bridged the gap for the period from 31 August 2003 to 31 May 2004 by providing cover for life risks until the contract was taken over by Prudential.
From December 2006/January 2007, Scottish Widows plc took over the underwriting of the life risks in PPI policies. Scottish Widows was acquired by LBG in 1999.
b) Credit card products – The general insurance risks were underwritten as to 50% of the risk by each of Norwich Union and Lloyds TSB General Insurance. This was structured as a reinsurance by GI of 50% of the risks underwritten by Norwich Union.
4 Please summarise the training that was in place for all staff selling PPI and through a tabulated chronology how this may have changed over time.
In relation to PPI, LTSB was committed to ensuring sales were compliant and invested in quality training for its staff. This training was regularly reviewed and updated, for example in 2004-2005 in anticipation of the introduction of ICOB. Staff training was also one of the areas focused on during the intense regulatory scrutiny that the industry and LTSB underwent in 2005-2008.
The training process required of a sales adviser selling PPI was comprehensive and involved a number of steps. We set out below a summary of some of the training that was in place for our PPI sales advisers.
Stage 1
Before sales advisers could begin selling PPI they were required to complete all Stage 1 training exercises.
Self Certification Process: Prospective sales advisers completed a short questionnaire on their personal financial and criminal record position. The completed questionnaire was reviewed by the National Recruitment Centre, which determined whether the sales adviser was a fit and proper person to be involved in selling financial products.
General Insurance Regulation Self-Study Workbook: Next, advisers completed a workbook on general insurance products, which included examples specifically on PPI. The workbook included topics on regulation, initial disclosure documents, LTSB’s statement of demands and needs documentation and training and competence awareness. The workbook emphasised the importance of determining the customer’s needs and matching those needs to appropriate and affordable products. The adviser’s supervisor was required to sign off that the workbook had been read and completed correctly.
The workbook and workshop were replaced by an online course towards the end of 2006. At the end of each module/case study, the adviser had to print 2 copies of their quiz/case study results. One copy was for the adviser and the other for the supervisor so that the results could be discussed at their 1:1 meeting.
General Insurance Regulation Workshop: The workshop was a half-day group session. Although it was designed to train advisers about insurance products generally, PPI was specifically covered in examples. The workshop covered similar topics to those in the workbook, and reminded advisers to consider eligibility and suitability when recommending products.
Online Product Knowledge Test: Prospective advisers were required to pass a number of online product knowledge tests, including one with questions on PPI. Tests were taken in a controlled environment and required a 75% pass mark.
Role Play Assessment: The final step before achieving "Initial Competence Status" and becoming eligible to commence selling was a role play assessment, observed by the adviser’s supervisor.
Stage 2
Once accredited as having achieved initial competence, sales advisers would have been authorised to begin selling. However, they were required to undergo further training over the next 6-12 months. This Stage 2 training consisted of observations and, if required, development meetings.
Observations: Sales advisers were required to be observed carrying out the sales process by their supervisor on a minimum of three occasions within 3 months of attaining initial competence status. Supervisors assessed whether the customers’ needs were appropriately determined, whether the sales adviser checked the customer was eligible for the policy sold, whether the policy sold was suitable and whether documentation was correctly completed.
Development Meetings: If, based on monthly management information, supervisors considered advisers required additional training, they would have arranged for a development meeting with the adviser. Advisers were also required to have monthly 1:1 meetings.
After the observations had been completed and, subject to any identified need for further training, sales advisers would have been eligible for "Competent Adviser Status" once they had maintained a Sales Quality Standards (SQS) status at the required level for one month. The SQS system is a management information tool which provided an individual risk rating for advisers and teams within LTSB. It took into account compliance, "not taken up" data, sales competence and penetration rates.
Further training and supervision
Competent Advisers were subject to ongoing training requirements, including reviewing LTSB guidance notes, undergoing regular observations and completing an annual online product knowledge test.
All sales made by a new adviser were validated for the first ten weeks an adviser was in the role. Advisers of 11-26 weeks standing had one week of sales per month verified, while more experienced advisers had one week of sales per quarter checked.
Changes to training post 2005
Changes were made at the relevant time to the content of the workbook and tests to reflect changes to regulatory requirements. PPI was covered in an increasing level of detail and specificity in training materials over the period 2006-2009, reflecting the process of discussion and engagement with the FSA.
A personal lending workshop was introduced in 2006, which covered discussion of the LPI sales process. By April 2007, this included a step by step explanation of how to conduct a compliant loan sale including LPI on Your Finances. Your Finances is an on-line system used for opening banking products with new and existing customers of LTSB. The application is used in the context of an interaction with the customer, either as an interview in branches or as a call to its telephony services. The workbook was moved online during 2007.
By May 2006, it was recommended that one of the required observations for attaining competent adviser status was of a PPI sale. This was then made mandatory in November 2006. An observation form specific to PPI sales was introduced in September 2008 and included questions on eligibility, suitability, interest being added to the premium and what happens if a loan is paid off early.
From Q3 2007 it was mandatory to verify a LPI sale as part of the regular process of monitoring sales.
Your Finances also controlled an adviser’s accreditation (My Role Accreditation (MRA), so an adviser was unable to sell until initial competence was achieved (ICD on accreditation). Also, if an adviser did not complete activities within the required timescales (re-accreditation of tests or observations), the accreditation would turn red and the adviser would be unable to access Your Finances to sell products.
Summary
LTSB training in relation to PPI was comprehensive and was tailored to ensure staff complied with regulatory requirements. Regular reviews and audits were conducted to monitor the robustness of the training programme.
The scrutiny that LTSB’s systems and controls were subjected to over the period 2005-2008 was intensive and the training regime and programmes were a central part of that review. The FSA did identify some weaknesses in LTSB's training and competence arrangements, although these were not considered significant by the FSA. The FSA concluded that there was evidence that suggested that a small number of LTSB advisers were selling PPI before completing their training and that assessment of the knowledge of staff could be improved. LTSB took on board those observations and made the necessary improvements. As stated elsewhere, during this period of intensive review, LTSB steadily revised and further improved its systems and controls.
5. Please summarise any incentive schemes that were in place for all staff selling PPI and through a tabulated chronology, if appropriate, how this may have changed over time. Please explain to what extent Executive Director and Senior Executive incentive schemes were impacted by PPI sales and how this may have changed over time.
We are providing a detailed response on incentive schemes in answer to the supplementary request we have received. The response has been requested by the Commission’s staff by 4 January 2013.
Specifically, in respect of any form of remuneration for Executive Directors and Senior Executives, at this level of seniority any financial targets would have been driven by the aggregate financial performance of the Group and areas for which these executives were responsible and we do not believe that these would have been broken down at the level of individual product performance. It should be noted that, in addition to financial targets, performance against a variety of non-financial measures has informed decisions on and driven the levels of Executive Director's and Senior Executive's pay (this includes specific risk and customer related measures).
6. With regard to the finances of the PPI product, please describe income, costs (including claims) and thus product profits. Please use a tabulated chronology, if appropriate, to show how this may have changed over time.
We did not assess the performance of PPI products on a stand alone basis. The performance of the PPI business could not meaningfully be assessed in isolation from the performance of the associated credit products. It should be noted that PPI sales were driven by sales of the associated credit product. The commonality of costs between sales of the two products, and the extent of economies of scope between the two products, meant that an allocation of costs between the two products is essentially arbitrary. We therefore request that you take care in drawing specific inferences about the economics of LTSB’s PPI business from the information provided below. Comparisons with other banks’ responses to this question may be meaningless if they have been prepared on the basis of different criteria.
As a result of a request from the Competition Commission, LTSB previously collated information of a similar nature covering the period from 2002 to 2006 (with calculations based on a number of assumptions). It should be stressed that this was not a standard report and was prepared specifically for the response to the Competition Commission (the figures relate to single premium PPI products, not regular premium PPI products).
In preparing the material, several assumptions had been made:
a) Material intra-group transactions were eliminated where they could be identified and supported.
b) LTSB undertook an annual "end-to-end costing" exercise which added up costs across the Group and allocated these to specific product types using an activity-based costing methodology. These costs were allocated using a particular cost allocation methodology. LTSB considered the PPI sales alongside the sales of the related credit products; the Asset Finance Division did not have activity-based cost estimates for their PPI products. Given this particular methodology, comparisons with other banks’ responses are likely to be meaningless unless they have used the same approach.
c) In accordance with LTSB’s accounting policy at the time, the contribution to results of PPI products sold in Scottish Widows was accounted for using the European Embedded Value accounting methodology.
d) Income was defined as:
Earned Premiums, Brokerage Commission Income, Reinsurance Commission Income, Profit Sharing and Investment Income
Less
Premium Rebates, Insurance Claims, Reinsurance Premiums, Commission expense, Profit Sharing and Interest on Endowed Free Equity.
The table below is indicative of the Contribution of PPI products to LBG Income before the allocation of direct (and indirect) costs.
The PPI income was calculated from individual business unit internal management accounts (Asset Finance Division, LTSB Insurance, Scottish Widows and the Retail Bank) where product specific information existed. In consolidating the results from business unit management accounts, intra-group transactions were excluded and eliminated to provide a Group view of the results. The Group PPI Income results are reported net of claims.
The analysis of income from sale of PPI by AFD was prepared on a Group reporting basis.
The table below is indicative of the Contribution of PPI products to Group Profits (after allocation of direct and indirect costs, but before any taxation impact).
It should be noted that the Total Expenses line of the above table does not include PPI costs for the Asset Finance Division.
Total net PPI income as a percentage of LTSB Group’s overall profit before income and tax was on average around 14% from 2003 to 2006..
7. How far was development of this product originally influenced by wider public policy objectives? Where a public policy objective did exert influence what did your bank perceive that objective to be?
Given the length of time since the original development of PPI products in the late 1980s/early 1990s, it is difficult to identify the extent to which wider public policy objectives influenced their initial development. We assume that a range of issues affected the initial development of PPI and this would have included:
· potential benefits available to customers (which are examined in more detail in response to Question 8 below) was important for customer demand and the development of the product; and
· the income stream from PPI from commissions from insurance companies (or customer premiums).
It should also be noted that, as outlined below in response to question 8, over this period there was a significant gap in protection products available to customers in respect of life assurance and income protection.
Even before the introduction of the FSA’s TCF initiative, LTSB spent considerable resources in ascertaining customers’ demands and needs and then refining its LPI policy in light of that. The fact is that not all the PPI products on the market were the same. Customer research demonstrated to LTSB that there was demand for an LPI policy that covered critical illnesses other than cancer and for a policy that paid out an amount equal to the loan in the event that the policyholder died or became critically ill. Therefore, in mid-2004 the product was changed to take account of these demands. Further research at the beginning of 2005 showed a degree of customer interest in tiered cover, which led LTSB to consider offering this option to customers (e.g. unemployment cover alone).
Some further examples of LTSB’s approach to evaluating and developing new products include:
· In 2005, LTSB considered offering pared down versions of its Loan Protection product and undertook customer research on the subject. Results showed that in the majority of cases, when offered a choice, customers preferred full cover to pared down cover; but that some customers who did not take full loan protection might take out a "lite" option. A pilot project was considered, but did not go ahead;
· In May 2006, LTSB undertook secondary research into debt suspension and debt cancellation contracts, similar to those in existence in the USA. LTSB’s view was that there was little merit in offering such a product at that time;
· During 2006, LTSB considered introducing a standalone monthly payable credit product to be marketed as a Bill Payer or Lifestyle protection product. The product was investigated prior to the introduction of the Post Office’s "Lifestyle Protection" cover. A planned product test did not go ahead.
As a result of the effort that has gone into product design, LTSB’s LPI product had a greater level of benefits than the LPI products of many of its competitors. Indeed, LTSB’s product had a 5 star rating (the highest possible) from Defaqto for its Personal Loan Payment Protection Insurance, meaning it was in the top 10% of policies for cover.
Defaqto’s Aequos database allowed for qualitative comparisons on a host of product features other than price. Using the "Project DNA" benchmarking feature a selection of different product covers, features and benefits were used to compare policies against each other. Each product feature was scored on a 1 to 5 basis, with a score of 5 denoting that the product has the best cover in the market for that feature; a score of 1 indicates it had the worst cover. We understand that the Aequos database is regarded as one of the most comprehensive databases of financial and insurance product data available in the UK.
One of the main benefits of LTSB’s LPI policy which it was considered differentiated it from the products of competitors was that, in the event that a policyholder died or became critically ill, it would pay out an amount equal to the original loan rather than the outstanding balance of the loan. This was a product feature that was driven by customer demand.
Although LTSB offered only one LPI product, it concentrated on making that product as flexible as possible in order to appeal to a wide range of customer profiles. The product also provided flexibility if the circumstances of a customer changed during the life of the policy. For example, a customer who took out a loan whilst in full-time employment would be entitled to cover in respect of unemployment, disability through accident or sickness, critical illness and death and would also be entitled to the benefits available under "Positive Job Solutions". If that customer then chose to stop working during the life of the loan, the nature of the customer’s cover would change. The customer would no longer be entitled to unemployment cover (all other elements of the cover remained in place) but they would become entitled to the 10% cash bonus [1] and the hospitalisation cover. If the customer subsequently returned to full-time employment then their level of cover would revert to the original level.
Customer demands continued to drive LTSB’s ongoing product reviews and LTSB endeavoured to respond accordingly when LTSB was reviewing and enhancing the design of its PPI products. What customers wanted was in part determined by the perceived benefits from PPI, which we address in our response to your next question.
8. What were the perceived consumer benefits of PPI and who were the perceived beneficiaries?
PPI is a product most customers hope and expect they will not need to use. It is insurance against financial hardship or insolvency caused by problems servicing debt due to unexpected unemployment or sickness.
According to the Swiss Re Term & Health Watch 2012, by the end of 2011 the Protection Gap for life assurance was at £2.4 trillion and there was an income protection gap of £190 billion. This was an increase from the 2002 statistics of a £2 trillion gap for life assurance and £130 billion for income protection. This suggests that the UK population is under insured and as a result there are risks if working people borrow money and then subsequently lose their jobs or cannot work. Not only does this mean that a borrower may have loan repayments that they would struggle to service, but if a borrower gets into arrears, this would aversely affect their credit scores. This could be detrimental to the borrower, even if they were fortunate enough to obtain new employment shortly afterwards. It should also be noted that 2005 to 2012 was to a large extent a period of considerable economic uncertainty and there was a generally perceived expectation that unemployment would rise. Indeed, as the financial crisis took hold though 2007 and 2008 there was a fear that the unemployment figures could rise towards 3 million. In fact the unemployment numbers for January in each year were as follows: 2005 - 1.43 million; 2006 – 1.56 million; 2007 – 1.7 million; 2008 – 1.62 million; 2009 – 2.06 million; 2010 – 2.43 million; 2011 – 2.51 million; and 2012 – 2.65 million (Office for National Statistics).
It is against that background, that one has to consider the value of the benefits of the LPI product whilst recognising that most people hoped they would never need to claim on the insurance.
We understood the personal factors which influenced the customer’s purchase of PPI may include:
· Concern that income or health may be vulnerable to change;
· Whether the respondent had dependents or not: a customer may feel they have a responsibility to ensure that loan repayments would be taken care of if they could not work so that they continued to have sufficient money to look after their dependents;
· Family and partner influence; and
· Desire for ‘peace of mind’ (that loan repayments are covered in case the customer becomes unable to work).
On that basis, PPI products may be generally more attractive to customers who are concerned about the above and so decide that a PPI policy might be useful in the future (or those whose family and partners are concerned about the other factors listed above). This can cover a broad spectrum of customers who wish to take out loans.
It was generally understood that the customers’ risk tolerance and ability to repay the debt or meet debt repayments from savings or other sources were also important factors in customers’ purchasing decisions.
A customer’s personal risk evaluations may include the individual customer’s assessment of a combination of their age, their job security and whether they know of friends or family who have suddenly been unable to work.
In general terms, although a PPI customer may not pre-plan to purchase PPI when they decide to purchase their loan, they may nevertheless value the security that the PPI product offers. This may particularly be so in respect of PPI for mortgages and secured loans given larger repayments and potential risk to an asset (such as the customer’s home).
Some customers may also wish to take out new loans or mortgages to refinance existing debts to reduce their borrowing costs. PPI sold with, and financed by, a new loan or mortgage therefore presents a way of freeing up money for their daily budgets, while protecting against the main risks of borrowing.
Accordingly, PPI serves a similar purpose to other forms of insurance, which is to provide protection against possible events and provide the peace of mind that flows from that protection.
B Mis-selling
9. What information sources or controls were in place to monitor whether PPI was being sold appropriately? How, if at all, did this change over the period 2000 to 2012, and did these processes identify that PPI was being mis-sold?
Like other banks, LTSB had interactions with the FSA, through industry bodies and (increasingly over time) on a bilateral basis to try to ensure that our sales systems and related processes (including training) were appropriate and fit for purpose. The summary of LTSB’s monitoring process should be read in conjunction with LTSB’s training scheme (which is explained above in response to question 4). The sales process and the pre and post sales documentation are also relevant as are the steps that we took to enhance these processes by the development of the Your Finances system. This was designed to ensure sales were compliant with the relevant regulatory requirements and to ensure consistency in the sales process across LTSB’s branch network.
Over the 2000-2010 period, LTSB had in place a scheme of monitoring through supervisors, in which the quality of sales was assessed. LTSB improved its controls at the point of sale and introduced a document known as Your Personal Summary and Our Recommendation (YPSOR) and developed Your Finances. These developments standardised the sales process as well as automating the process the sales adviser had to follow with a customer. As it was online, it recorded each step of the process and therefore helped with monitoring sales.
In addition to the controls and monitoring described below, advisers had a discussion with the customer at the point of sale to determine the suitability of PPI for the customer (also having access to customer information from LTSB’s Customer Insight system) and documents were provided to the customer regarding PPI. The purpose of the customer documentation was to enable the customer to see whether they were eligible for loan protection insurance, what benefits they were eligible for at the point of sale, what benefits they could be eligible for if their circumstances changed and the exclusions which were, or which may at some future date become, applicable to them.
Monitoring by supervisors
Monitoring was undertaken at a number of different levels within LTSB. In addition to supervisors reviewing the SQS data, monitoring was also undertaken by the Area Risk Teams via their Area Risk Assessors. The Area Risk Teams undertook risk based assessments to test sales quality and training and competence supervision within their Local Director Groups.
Store Services Risk and Compliance provided an independent challenge by reviewing the SQS data and making customer contact so that they could monitor the robustness of supervision and sales quality within the Branch Network. Where significant issues were identified, Store Services Risk and Compliance conducted special investigations.
Group Audit also undertook an independent rolling risk based programme for testing the systems and controls within the Branch Network.
The levels of monitoring that were in place may be summarised as follows:
· Local Director Group Level: supervisors analysed SQS to identify strengths and weaknesses;
· Area Level Monitoring: Area Risk Managers reviewed risk reports and SQS data and directed Area Risk Assessor activity. Area Risk Managers provided monthly reports to the Area Director and Store Services Risk and Compliance;
· Area Risk Assessor monitoring: Area Risk Assessors provided periodic assessment of Training and Competence effectiveness and monitored the quality of the supervision (with the frequency of assessment based on risk); and
· Store Services Compliance monitoring: Store Services Compliance took a risk based approach and their monitoring included reviewing and challenging Area Risk Managers’ monthly reports, reviewing and challenging SQS data, performing "Advice Quality Reviews" and undertaking document verification exercises. Issues identified were escalated to Area Risk Teams.
Controls at Point of Sale
We have commented above on YPSOR, which was a process document that provided guidance in respect of matters an adviser should consider in the fact-find stage and suggested certain matters that should be considered (such as customer’s personal details, occupation and income and borrowings). During this period LTSB’s sales process underwent reviews and improvements. For example, we made improvements to YPSORs through 2005. In mid 2006, we developed Your Finances, which was a significant step in the account opening sales process.
The Your Finances programme contained processes for staff to follow and for customers to answer, which determined the flow of the process. If an answer showed the customer was not eligible, the programme would not let the adviser proceed. Compliance rules were embedded in the programme and shared with customers during the process.
Those improvements, including creating an electronic footprint, were key tools that improved our monitoring of compliance. Those processes also provided a control system at the point of sale which was aimed at preventing sales of policies where customers were ineligible to claim on the associated cover. They were also designed to ensure that the sales were compliant, that is to say that the sales were suitable in light of the demands and needs of the customer.
Customer feedback
In addition to the above, customer service feedback and information were monitored quarterly using CARE scores which gave an overall picture of customer satisfaction. We accept that customer satisfaction does not signify a compliant sale but it is nonetheless a valuable source of information and was useful alongside the other information referenced here. LTSB also used the CARE scores to determine which areas of the service element of the customer proposition required improvement. Staff were also trained to take time to ask customers for feedback when dealing with any claims.
In addition, in respect of the identification of mis-selling, we refer to the response at questions 16 and 18 below.
10. At any stage did the bank decide to review PPI mis-selling? If so please describe the nature of reviews, i.e. how reviews were conducted, by whom, what conclusions were reached and what changes were made. With regard to any changes to the way PPI was sold please identify the decision making body and its chair.
As the responses below show, LTSB carried out regular reviews of its processes to ensure that it complied with the regulatory requirements and to make improvements when appropriate. This was a continuous process. An example of a specific review LTSB conducted was in response to the FSA’s "Dear Chief Executive" letter in November 2005. In that letter, the FSA raised a concern about the eligibility of some customers for PPI policies (i.e. had they bought cover that they could not claim on).
Given the importance of this issue, LTSB decided to investigate it specifically as a separate exercise from its normal processes. As part of the review, LTSB reviewed its data for all PPI sales on unsecured loans in the branch network in 2005. The review involved identifying possible indications of sales to ineligible customers based on age and employment status based on point of sale data. LTSB then took results relating to potentially ineligible customers and cross referred the results against the bank account data held on its Insight system (which would show account activity). Its total estimate of ineligible sales was 1.62%.
As a result of its finding, for historical sales, LTSB decided to honour future claims where customers would otherwise have been turned down on the basis they were ineligible, to reopen any claims rejected on that ground since 14 January 2005 and to reopen any complaints rejected on that ground since 14 January 2005. For future sales, LTSB introduced an eligibility checklist and continued to make system enhancements designed to completely eradicate ineligible sales. The FSA was informed of the work done.
11. What actions were taken in response to external reports of mis-selling by such as WHICH?, the FSA and FOS?
12. Details of when the bank became aware that PPI was being mis-sold, including details of any involvement of the Board and the control functions within the bank in discovering mis-selling.
Given the intertwining nature of the issues raised by the questions, LBG has dealt with Questions 11 to 12 together with Questions 17 to 18 below.
13. A timeline of the action the bank took, both externally and internally, when it discovered that it was mis-selling PPI.
LBG has referred earlier in this response to its belief that complying with detailed rules was sufficient and the misunderstanding that the industry had with the FSA’s interpretation and expectations. That misunderstanding was effectively resolved after the High Court handed down its judgment in the Judicial Review in April 2011.
Following LBG’s decision on 5 May 2011 that it would not support any appeal by the BBA of the High Court judgment, LBG took the following action:
· Established and maintained an open line of communication with the FSA and FOS to specifically deal with PPI redress.
· Updated customers through a statement and comprehensive set of FAQs on LBG’s website as well as further communication by letter and telephony in relation to how we were handling PPI complaints and redress.
· Upheld on an ex gratia basis any PPI complaint which was still outstanding on 5 May (including those that customers had referred to the FOS) to ensure those customers did not face any further delays.
· Developed, implemented and reviewed processes and procedures to enable LBG’s complaint handling teams to respond compliantly and fairly to customer complaints. These processes and procedures took into account LBG’s legal and regulatory obligations, as clarified by the Court’s judgment, including the FSA’s Policy Statement 10/12, the FSA Principles and DISP as well as the ABI Code, GISC, ICOB, ICOBS and other legal and regulatory standards.
· Conducted analysis to identify cohorts of customers whom LBG needed to proactively contact to resolve any issues with the sale of their PPI policy. LBG has now started to send letters to customers in the relevant cohorts.
· Built a large and complex complaint handling team, support team and associated infrastructure to manage the complaints and pay any redress due. As at December 2012 our PPI Operations team consists of around 7700 of FTE staff across 25 sites and is estimated to have cost £614.5m to date.
14. What sanctions, including clawback of remuneration, have you placed on any staff who were involved in mis-selling of PPI? Please indicate the level within the organisation at which these staff were working. Please also indicate whether or not the bank continues to employ them and, if not, whether they are working in an FSA controlled function at another regulated firm (according to the FSA's register of Approved Persons).
LBG has made a public statement concerning the adjustment of bonus awards in respect of the performance year 2010. The Remuneration Committee Chairman also addressed the point in his statement in the 2011 Annual Report and Accounts. Copies of both documents are attached to this response.
LBG is not able to comment on the current employment of former employees.
15. What discussions did the bank have with its External Auditors about PPI mis-selling and on what dates?
Throughout each year LGB held regular discussions with the External Auditors about all relevant accounting matters including PPI.
16. Why, in your opinion, did the market itself fail to "correct" the mis-selling of PPI?
As we explained in the preliminary points, it is accepted now that there was mis-selling but this only became clear with the Court’s judgment in the BBA’s Judicial Review challenge, which made clear that compliance with FSA rules was a necessary but not sufficient condition to meet the FSA’s over-arching Principles for Business. Until that point we believed that complying with the detailed rules was sufficient to sell compliantly and at no stage did we believe that our PPI sales were not compliant. Once the clarity was obtained in the judgment, the banks had a choice – to continue the challenge or to accept that clarity and act upon it. We decided we would not participate in an appeal, which effectively ended the challenge from the industry.
We refer you to our response to Question 18 which enquires about regulatory interventions over the relevant period and in doing so we explain the different phases of that six year period.
C Regulatory Intervention
17. At what stages during the period your bank sold PPI did regulatory intervention cause the product to be reviewed? What was the substance of these reviews and what changes were implemented as a consequence of these reviews? With regard to the FSA report on PPI in 2005, what action was taken at all levels of the bank from the Board downwards?
Questions 11, 12 and 17 are closely linked to Question 18 and the response to all four questions is set out below in LBG’s response to Question 18.
18. To what extent did regulatory interventions alter the way PPI was sold by your bank? Please summarise where any of these interventions may have given rise to a view within your bank that sales processes were fit for purpose.
Since FSA regulation of General Insurance began in early 2005, there has been significant regulatory intervention in one form or another in the area of PPI. For a large part of this time, LTSB and the industry were heavily scrutinised by the FSA. Before and after the commencement of regulation, LTSB always sought to do its best to comply with the laws and address the FSA’s concerns.
It will be apparent from LBG’s response to this question that there has been very considerable regulatory involvement and oversight and that this took different forms at different times. At Annex 3 is a detailed chronology of events that LBG has prepared. LBG has reflected on all that occurred in this regard and LBG considers that it might be helpful to explain how matters developed if the period since the start of FSA regulation is broken down into three phases. At Annex 4 LBG has attached a visual chronology of the phases for your convenience. In general terms, the phases may be described as follows:
· Phase 1 (a 4 year period from the start of 2005 to late 2008) – This phase was characterised by detailed rules and close oversight and scrutiny by the FSA. The period started with the detailed ICOB requirements and then involved thematic visits, supervisory visits, enforcement investigations, publication of Final Notices at the end of enforcement actions and later in the period the coming into force of the revised requirements set out in ICOBS which were the result of, and informed by, all the work that the FSA had conducted during that 4 year period;
· Phase 2 (a 1 year period from mid 2008 to April 2009) – This phase can perhaps now best be described as the period of change and as a result of those changes the period in which the misunderstandings arose. There was an increasing number of complaints and a markedly increased uphold rate of complaints by FOS which led the FOS to ask the FSA to take action to remedy the situation. The FSA increasingly placed its focus on the Principles and the outcomes that it wished to see and the industry endeavoured to address these emerging issues by seeking to agree a Statement of Principles with all interested parties including the FSA and the FOS. The industry, through the BBA, put a lot of effort into doing so until the FSA made clear that it would address the situation through new rules and guidance; and
· Phase 3 (a 2 year period from May 2009 to April 2011) – This phase involved the FSA formulating and consulting on its proposed new rules and guidance for complaint handling which resulted in the disagreement between the industry and the FSA, culminating in the BBA’s Judicial Review challenge.
The key events that took place that are relevant to the question are referred to below but it may be helpful to read them in the context of the phases just described.
Commencement of FSA Regulation
ICOB came into force on 14 January 2005. It was very detailed, comprising a total of 173 rules, 2 EPs and 222 Guidance provisions. The FSA Principles for Business, which included the requirement to treat customers fairly, had already been in existence for some years (they were included in the Handbook on 1 December 2001) when the ICOB rules were introduced, and the ICOB rules make reference to the Principles.
The requirements of the ICOB rules included for product and price disclosure, a detailed and prescriptive regime for the disclosure of information to customers, the form in which that information was to be provided, the detailed contents of that information, and the time in the sales process at which the information was to be provided. This regime was put in place following an extensive consultation process, in which the FSA had considered the merits of requiring additional disclosure but decided against doing so. Other concerns were also raised concerning sales of PPI which the FSA considered were sufficiently addressed by its proposals.
Our preparation for the new regime
Prior to the commencement of FSA regulation, LTSB participated in the consultation process (beginning in about December 2002) and the business was fully engaged and committed to delivery of the new regime in January 2005.
Each tier in the governance structure created to prepare for implementation had its own distinct responsibilities. The Group Business Risk Committee (GBRC) was at the highest level and was responsible for the oversight of the entire implementation project across LTSB. A Steering Committee (established in January 2003) made regular reports to the GBRC.
The structure put in place for handling implementation may be summarised as follows:
· Steering Committee - the Steering Committee (called the General Insurance FSA Regulation Steering Committee) was responsible for the co-ordination of implementation across LTSB. It received regular reports on progress from Divisions and the Project Managers Forum and reported to the GBRC.
· Divisional Steering Committees – these were responsible for ensuring that the new regime was implemented with consistency within each individual Division. Regular updates were provided to the Steering Committee.
· Project Managers Forum – this was responsible for ensuring consistency across LTSB’s Divisions and Business Units. Regular updates were provided to the Steering Committee.
· Business Unit Steering Committees – these sat within each Business Unit to ensure that the project was implemented with consistency within that Business Unit.
· Individual Business Units – these were responsible for delivery in their area. The management of risk issues was embedded within the business units who were fully accountable within their own areas.
Significant preparation went into the implementation to be ready for the commencement of regulation. Further, following commencement, LTSB conducted regular internal audits (audits in August to November 2004 were shared with the FSA), which showed a pattern of improving progress and a resolution of issues.
From the outset, LTSB was committed to continuous improvement and as a result of a Post Implementation Audit in July 2005, work was done on the YPSOR and improvements were implemented in October 2005 (including new on-screen options which helped sales staff complete the YPSOR in a consistent and high quality manner).
First Thematic Review
In mid 2005, the FSA conducted its first thematic review of the industry (with the results published in November 2005). As part of this review, the FSA conducted mystery shopping exercises and supervision visits covering both mortgage and consumer credit policies. In general terms, the conclusion of the FSA’s review was that the sale of PPI policies, particularly in respect of consumer credit, sub-prime mortgages and secured loans, posed a high risk to the FSA’s consumer protection objective. Key issues the FSA identified were:
· Risk of inappropriate sales;
· Risk of unintended advice;
· Poor quality of advice;
· Incentives and targets could lead to mis-selling;
· Inertia selling;
· Over-reliance on printed documentation; and
· Training and staff competence, as well as compliance monitoring, were often of poor quality.
At the time of the first thematic review the FSA published a "Dear CEO" letter directing firms to take action set out in the annex to the letter to ensure compliance with the rules. The FSA and BBA discussed the issues arising from the first thematic review and a schedule of action points was drawn up. The discussions subsequently led to an agreement with the industry in October 2006. In essence, it was agreed that single premium PPI policies would not be offered with "nil refund terms" and other matters relating to refunds. There was no stipulation in the agreement that firms were not to sell single premium policies.
In a letter LTSB received in November 2005, the FSA expressed concern with customer eligibility for PPI products. As set out above, LTSB investigated this concern and identified that there appeared to be about 1.62% of ineligible cases. LTSB took remedial action in respect of these ineligible cases (with the aim of eliminating customer detriment) and undertook further proactive enhancements to eradicate the problem.
Also from about this time, LTSB was under further close scrutiny from the FSA across all aspects of branch based single premium PPI sales.
LTSB cooperated with the FSA as part of this process and took a proactive approach to addressing their concerns. In particular, during that period LTSB was doing its best to continuously improve and enhance various aspects of its systems and controls.
LTSB continued to work on its point of sale process document (YPSOR) and implemented further enhancements in February 2006 (with YPSOR2). LTSB included an automated fact find process which was completed by the adviser to ensure customer demands and needs were recorded (including an eligibility checklist). The YPSOR was then populated automatically. These tools assisted LTSB to ensure compliance and provide an audit trail as to what happened in the discussions that took place between the customer and the adviser. The sales processes and platforms used were amended to match regulatory changes (such as when ICOBS commenced).
As a result of the FSA’s scrutiny (which was resolved in early 2008), it appeared there were potential weaknesses in LTSB’s training and competence (in the period January 2005 to December 2005), its point of sale processes (particularly from January 2005 to October 2005) and its post sale compliance monitoring. Steps were taken to address all of these matters.
Second Thematic Review
The FSA completed a second thematic review of the industry in October 2006. This review involved FSA visits to check for improved compliance in April to June 2006. As a result of its further review, the FSA considered that in general many customers were not being treated fairly, although there had been improvements in training, compliance monitoring, written disclosures and policy documentation and the use of management information. However, the FSA thought there were continuing issues with:
· Informing customers that PPI was optional;
· Failing to inform customers of the true costs of the policy (including interest payments made on a single premium policy);
· The communication of exclusions to customers, resulting in the purchase of products customers may not be able to use;
· Failing to collect required information on the customer to ensure the policy was appropriate; and
· Bias towards the sale of single premium policies.
As part of LTSB’s approach of continuous improvement, in mid 2006, LTSB implemented the Your Finances sales platform programme. This programme facilitated compliance requirements to be embedded and allowed for compliance updates to be fed into the system in a very short space of time (which is quicker than educating a workforce). The system was designed to allow both the adviser and the customer to view the screens during the sales process. This enhanced the customer experience and reduced the chance of the system being abused. All customer responses were recorded electronically and could be reproduced later (which is useful from a compliance perspective).
Further, LTSB engaged external advisers in 2006 to review its systems and to advise on improvements with a view to ensuring full compliance.
Following the FSA’s second thematic review, the FSA fined a number of firms in respect of PPI failings (although none of the companies now part of LBG was fined).
Also during the time of its thematic reviews, and into 2007 and 2008, the FSA was pressing firms to commit and implement its Treating Customers Fairly initiative. In January 2007, as part of the FSA’s work with the industry on single premium PPI refunds on cancellation, LTSB amended its policy documents to give greater prominence to the right to terminate after 30 days.
Third Thematic Review
In January 2007, the FSA announced a further review of the industry, which was completed in June 2007 (and the findings published in September 2007). The review involved mystery shopping and visits to certain firms. In light of problems the FSA identified as part of this review, the FSA proposed to carry out further mystery shopping exercises to gather additional information and to use that mystery shopping as the basis for enforcement proceedings where appropriate.
Also during this period, the OFT referred the PPI sector to the Competition Commission to carry out a full enquiry. Part of the scope and aim of that enquiry concerned potential features of the market that were considered harmful to consumers, such as PPI being a secondary purchase and the point of sale advantage to firms. LTSB responded to the Competition Commission’s request for information.
ICOBS
The FSA developed ICOBS (following consultation with the industry from mid 2007) which was a revised set of rules governing the sale of general insurance products including PPI. ICOBS was introduced on 6 January 2008, with a six month transition finishing on 5 July 2008. The main changes as a result of the introduction of ICOBS were that the previous rules were simplified as part of the move to a more principles-based regulation. New high level standards and further detailed rules and guidance were also introduced.
ICOBS also introduced some new specific provisions for PPI. The FSA considered that the original "target outcomes" of the ICOB regime had not been met, and therefore proposed additional requirements for PPI where it considered that the rules did not address certain market failures.
As a result, LTSB were required to again examine its systems with a view to ensuring compliance with the new rules. The FSA concluded its specific review of LTSB’s PPI sales process in January 2008.
In November 2007 and March 2008, LTSB wrote to 516,000 customers (in a form agreed by the FSA) to remind them of their right to cancel LPI at any time during the course of the loan and their ability to continue with the loan following cancellation of LPI, with a reminder that there was a rebate entitlement. In respect of the November 2007 letter, only around 1% of customers mailed subsequently cancelled their LPI policy.
Further mystery shopping exercises and thematic update
Following the further mystery shopping exercises foreshadowed by the FSA’s third thematic review, in September 2008, the FSA published a thematic update summarising its high level findings. The FSA described the results as poor, citing certain failings. The FSA did not publish its results or an analysis of the mystery shopping exercise.
The FSA requested that we, along with other banks, agree to a past business review overseen by one of the major accounting firms. Given that this would be a significant and costly task, LTSB enquired as to how the mystery shopping exercise had been undertaken. LTSB found that the mystery shopping exercise that the FSA had conducted had involved people who had shopped but who did not buy products. This caused us considerable concern over the reliability of the findings. The system led sales process LTSB used ensured compliance at the point in time when the customer had made an initial decision to purchase. Only after that initial decision would the customer be taken through the mandatory stages of the sales process where the critical information was provided and the necessary disclosures were made. Therefore, the FSA’s view that various key matters had not been covered with these "customers" was for that reason not surprising.
FOS and handling of disputes
In July 2008, the FOS Chairman wrote to the FSA regarding what was considered a systematic problem in the sale of PPI and suggested that regulatory tools could be used to ensure firms take appropriate and proportionate remedial action. This appeared to follow from the FOS experiencing very large numbers of PPI sales complaints from consumers and upholding high percentages of such complaints. However, the experience of the industry was quite different. Until mid 2007, FOS received a relatively low number of complaints about PPI and between 2005 and late 2007/early 2008, most BBA members experienced uphold rates of around 20% to 30% for PPI complaints referred to FOS. The volumes of complaints began to increase in 2006 (relating to the publicity of the Citizen’s Advice Bureau "super complaint") and volumes increased further in 2007, coinciding with negative publicity surrounding the Competition Commission’s investigation (see our preliminary comments on the Competition Commission’s investigation). The FOS uphold rates increased markedly between 2005 and late 2007/early 2008 such that the FOS was upholding 90% of complaints in favour of the consumer. In early 2010, (after the FOS letter to the FSA and the FSA’s response to it), at a meeting between the BBA, the FSA and the FOS, the FOS sought to explain that the uphold rate had in fact always been around 90% in relation to sales complaints and that the change was due to the fact that the earlier complaints had been mostly about claims. This was not however the view of the industry which regarded the change in uphold rates as being the result of a change in the approach of the FOS to PPI complaints.
Failed Negotiation of Statement of Principles
In light of the letter from FOS to the FSA regarding PPI complaints, in around October 2008, the BBA sought to liaise with the FSA in order to develop an industry approach regarding a standard set of principles for PPI complaints handling. A drafting committee was established to prepare a Statement of Principles for Complaints Handling. Into 2009, the BBA worked closely with the FSA and FOS on a Statement of Principles.
On 8 April 2009, the Chief Executive of the FSA published a reply to the FOS Chairman’s letter dated 1 July 2008. The response summarised action already taken by the FSA and showed that the FSA planned to consult upon handbook guidance on firms’ handling of PPI complaints. On 26 May 2009, the FSA wrote to the BBA. In general terms, that letter stated that given the concerns raised by FOS and the need to ensure swift redress to customers, the FSA was of the view that new rules and guidance on PPI complaint handling should come into force as soon as possible. Accordingly, the negotiations to develop a Statement of Principles ceased.
FSA consultation and guidance on complaint handling
On 29 September 2009, the FSA issued a consultation paper on its proposals on PPI sales complaints handling (CP09/23). At the same time, the FSA issued an open letter to various trade bodies setting out "common failings" but which the industry took as describing standards.
On 9 March 2010, the FSA issued a second consultation paper (CP10/6) regarding proposals on PPI sales complaints handling. The consultation paper this time attached a revised open letter to trade bodies which recast the FSA’s description of some of the perceived failings. Notwithstanding consultation with the industry, a mutually acceptable position regarding the handling of complaints was not reached.
In August 2010, the FSA issued PS10/12, which, in general terms, dealt with the approach firms should use in handling and assessing complaints about the sale of PPI policies and determining redress when a complaint is upheld. Guidance was given not only on the manner in which complaints should be dealt with by firms as a matter of procedure, but also on how the FSA’s Principles for Business and other rules should be considered in determining the substance of the complaints.
The BBA commenced a Judicial Review challenge as a result of PS10/12, given it was concerned that firms could be required to apply the FSA Principles for Business in such a way as to contradict or augment specific rules governing the sale of and handling of complaints about PPI. This was a technical legal argument and the BBA was unsuccessful in the High Court (the decision was handed down in April 2011).
D Recovery
19. What was your Board and Executive Committee's assessment of the root causes of PPI mis-selling at your bank? Please provide minutes of any discussions about root causes that took place at Board and Executive Committee.
LBG has given careful consideration to the lessons that need to be learned from PPI and has done so at many different levels within the organisation. In respect of minutes of Board and Executive committees, typically, the major work on root causes has been focused on an overall culture change to Conduct Risk which includes much greater focus on the customer interest and likely customer behaviours in product design and governance, incentives, sales outcomes and compliance with the over-arching FSA Principles of Business, including an emphasis on treating customers fairly in spirit as well as via compliance with detailed regulation. Key metrics to measure progress have included a very close focus from senior management and the Board on any products whose profitability exceeds the Group average and industry averages; and on the reduction in causes for complaint: careful root-cause analysis has allowed a steadily improving complaints ratio (FSA reportable) which, ex-PPI, has fallen from 121,906 in the first half of 2011 to 96,276 in the first half of 2012, a reduction of 21% and is targeted to fall lower still in the coming year.
Over the period since 2005, and in particular following the financial crisis and the emergence of PPI as a major issue, LBG senior management and the Board have taken a very proactive approach to the development of an enhanced conduct risk strategy and associated control framework. The regulatory environment has, understandably, grown every more challenging in relation to conduct related matters with continued intense scrutiny from regulators, politicians and the media.
While LBG has not been unique in receiving this additional level of scrutiny, it has been very conscious of its overall objective of being Best Bank for Customers and its conduct risk strategy has therefore been a key priority for both senior management and the Board. The Group has no appetite for systemic conduct issues and has a desire to ensure customers receive a fair outcome.
Over the last two years, conduct risk has been discussed at Group Risk Committee and Board Risk Committee – it is generally nearly always the first item on the agenda and is always actively discussed. The discussion includes detailed management information on outcomes for customers and complaint levels for example.
The need for change was well recognised even before the publication of the judicial review PPI judgement. In early 2009, LBG commenced a strategic review of its conduct risk capability and framework- some immediate improvements were made. Key examples were the restructuring of current account fees for HBOS customers, the launch of the Halifax Clarity Card (praised by the consumer champion, Which?) and the commencement of a significant complaints reduction process. The key learning the Group has sought to take forward is that compliance with the rules itself is not enough- there needs to be a focus on a more holistic, through the cycle, approach to managing conduct risk focussed on customer outcomes, i.e. not just adherence to the strict letter of the rule book. As a result of the review, LBG put in place a programme of activity focussing on five key work streams:
· Back Book- to identify and, as far as possible, mitigate any future risks arsing from the back book, and also to identify themes and lessons learnt from back book issues which could be carried forward;
· Complaints- to reduce significantly the volume of complaints received by LBG through robust root cause analysis and addressing the underlying issues;
· Sales process- both LTSB and HBOS had developed and implemented sales processes which tended to focussed on meeting the letter of the regulatory requirements rather than being more holistically focussed on outcomes. The focus would shift to ensuring our sales processes delivered the right outcomes for customers;
· Product Governance- to introduce enhanced product governance processes including the use of a product risk assessment tool kit, the requirement for annual product reviews; and
· Governance and oversight- creation of conduct risk capability within the Risk Division as well as enhanced governance to improve line of sight to conduct related matters.
The work programme was approved at the Group Business Risk Committee in July 2010 and subsequently by the Risk Oversight Committee of the Board in August 2010. The strategy has been most recently updated, and refreshed and presented to the Group Risk Committee in November, followed by the Board Risk Committee in December 2012.
Examples of activity since 2009 include:
· The introduction of a single set of customer treatment standards across the Group- including complaint handling, treatment of customers in financial difficulties; claims handling, responsible lending and sales. Each area of the Group has evaluated itself against the standards and introduced enhancements as required in order to achieve compliance;
· Embedded the use of the product governance toolkit- all LBG products, both front and back book have now been through the annual review cycle at least once;
· Introduced enhanced governance on conduct risk across the Group;
· Engaged actively with the regulator on conduct related issues including, in some cases, making a direct contribution to the development of future policy. The FSA’s revised rules on packaged account sales which come into force at the end of March 2013 require annual benefit reminders and eligibility statements to be provided to customers. LBG has provided such statement for the last two years;
· Implementation of a Group Product Governance Committee which reviews all products which are rated related high risk through the product governance process;
· The introduction of Conduct Risk Appetite Metrics (CRAMS) across the Group enabling improved measurement and management of conduct risk over 2013 this will include the development of enhanced value for money metrics;
· Development of enhanced tools for measurement of conduct risk- including models. The aim is to bring our experience and approach in the credit risk experience to bear on the management of conduct risk. This work is very much in its infancy.
· Significantly reduced the volume of FSA reportable complaints across the Group. We have reduced Banking complaints (excluding PPI) from 121,906 in the first half of 2011 to 96,276 in the first half of 2012, a reduction of 21%. When compared to our peers we have 1.4 complaints per 1000 accounts. This compares to Santander at 5.2, Barclays at 3.8, RBS at 3.6 and HSBC at 2.4. We expect to improve upon this again in the second half of 2012 and we have a medium-term target to achieve banking complaints of 1.0 complaints per 1000. In terms of quality we have the lowest change rate at the FOS, we are at 24%. This compares to Santander at 52%, RBS at 43%, Barclays at 41% and HSBC at 25%. This means when a customer refers their complaint to the FOS the decision is held in our favour in 3 out of every 4 banking (non-PPI) complaint cases.
· Introduced enhanced outcomes testing methodologies across the group which include direct customer contact to check that fair outcomes are being achieved;
· Commenced mailing to customers on interest only mortgages in order to provide support and guidance to those customers as they reach the end of the their mortgage term;
· Focus on simpler, more transparent products which meet the needs of customers, such as EEC referred to below;
· Improved transparency on savings rates- all savers with LBG can now see their interest rate on line and on statements;
· Introduced the ISA Promise that ensures customers receive interest at the point they apply for an ISA.;
· Removed the need to register for aspects of the insurance cover contained within a packaged current account making it easier for customers to claim;
20. What has the Bank done to address the root causes of PPI mis-selling? What has been done to prevent mis-selling happening in the future?
In our introductory comments we have set out the lessons learned from PPI, namely:
· Product design
· Value for money & customer needs
· Incentives
· Detailed root cause analysis
· Greater involvement of senior management; and
· Better sales outcomes
In our response to Question 19 we have set out how we have a vigorous conduct risk strategy that ensures we have embedded detailed root cause analysis in the business and the greater involvement of senior management in such issues.
In our response to Question 25 we have set out how the lessons learned have been implemented in the EEC product in product design, the focus on value for money and meeting customer needs as well as better sales outcomes.
In addition to those points, LBG now has a much stronger product governance process in place for all new product propositions and is actively learning lessons from the events surrounding PPI products. This reflects the FCA’s early product intervention powers, with the objective of ensuring that products are appropriately designed from the outset. LBG believes that there are two key factors which mean product governance is now stronger than it was leading up to and during the sale of PPI and this reflects the lessons learned. These two factors are:
1. A much stronger and robust governance framework at the divisional level; and
2. High risk products are signed off by the Group Product Governance Committee.
LBG has introduced a more formal structure around product governance at both the divisional level and the Group level. While previously divisional product governance committees previously existed there was less prescription on approach and membership. Product Governance committees now have to meet monthly; are chaired by a senior Director and take all products through a detailed product risk assessment. These committees are able to sign off items rated up to medium risk.
LBG’s governance committees look at the design of individual products and how they will be sold through the branch network. On the retail side LBG has three risk committees: a ‘Banking Governance Committee’ looking at products such as Personal Current Accounts and Credit Cards, a Mortgage Governance Committee and an ‘Investment and Protection Governance Committee’ looking exclusively at investment and protection products.
Before going to the divisional committee for sign off, new products are scored using detailed Risk Assessment Scorecards which are tailored to a particular product – these scorecards have been developed in the last two years and ensure a common and robust approach to product assessment. The products are scored jointly by the product teams and the Group’s Risk function and are then submitted to the relevant Committee for approval.
Those products which LBG believes require greater scrutiny are escalated to its Group Product Governance Committee. This is chaired by the Chief Risk Officer and attended by members of the Group Executive Committee. Examples of recent products which have gone to this Committee for approval before launch are LBG’s new EEC product offering income protection.
We also place greater emphasis on after sales contact with our customers to ensure that the product they have purchased is appropriate and meets their needs. We monitor customer feedback and use this to continue to improve our products and services. As mentioned above, in our response to Question 25 we set out in more detail the steps we have taken in respect of our EEC product.
21. PPI is a product that was cross-sold alongside another product. Please provide details of retail products you currently commonly cross-sell.
We believe it would be helpful to answer Question 21 with Question 22.
22. Please explain the advantages of cross-selling and risks arising from cross-selling from both the bank's standpoint and the customer's. Describe how you mitigate against any risks arising from cross-selling.
Cross-selling is a common practice across many industries where the provider offers several (typically) related products or services and where many customers need more than one of the products and services the firm provides.
When customers look to purchase a mortgage from LBG they are also offered home contents and building insurance and life insurance (to cover the outstanding mortgage balance in the event of the death) at the same time. Many customers purchasing a mortgage will clearly want and need building, contents and life assurance. Although it would typically be a requirement that any mortgage customer holds building insurance to cover all the risks associated with damage to the property against which the mortgage is secured LBG does not force the customer to take any of its related products. The customer can shop around and compare offers from other providers to see which best meets their needs and offers the best combination of terms, service and price.
LBG also tries to deepen its customer relationships and, therefore, offers cards, savings accounts, loans and mortgages to current account customers if they need or use these other products. In certain cases LBG offers these at a discounted rate. For example, under the Halifax brand we offer the Reward Saver Account. This account offers a higher rate of saving and is available to our Halifax Current Account customers who pay at least £1,000 per calendar month into their Halifax current account or hold a Halifax Ultimate Reward Current Account. These customers would also be eligible for a £150 cash back reward if they took out a mortgage with the Halifax. Under the Lloyds and Bank of Scotland brands LBG offers preferential savings rates to existing Personal Current Account (PCA) or packaged account customers. We do not view offering discounts such as these as tying or bundling.
In the example cited for mortgage customers, it is clear that cross-selling brings greater convenience and price benefits to the customer – as long as products are designed and sold appropriately and meet the customer’s needs.
Customers will often pay less for their banking where they hold more than one product with the same provider as providers will offer discounts to existing customers on products with fees or offer better rates on savings and lending products where a customer holds more than one product. Customers may prefer to deal with a single organisation so that they only have to make a single call to a single number or use one internet or mobile phone banking platform to deal with their core banking needs.
From a providers’ point of view there are often fixed costs of serving customers and/or low incremental costs of providing additional services when they already have an existing relationship in place. This allows providers to reflect some or all of these lowers costs in the price they offer customers who take more than one product or service.
A customer holding four products with a bank will typically have a lower cost to serve than the sum of the costs of serving four customers holding the same four individual products. Marketing and acquisition costs will also typically be lower for a cross sale to an existing customer than to a new customer. These lower costs will typically be shared with customers through lower fees and/or better rates on interest bearing products.
LBG believes that there are no inherent risks arising from cross-selling as long as products are properly designed and sold and customers’ needs are met. We do not believe that the issues which arose around PPI were related to the fact that it was sold alongside a credit product. We have set out some of our views around those issues in our introductory comments.
23. Please provide details of products you currently commonly bundle together and whether or not you explicitly charge for that bundle.
LBG offers very few bundled products as part of its range. As outlined in section 21 we do offer discounts or preferential rates to existing customers who choose to take out additional products or services. Examples include better savings rates offered to current account holders.
Like the majority of high street banks LBG offers packaged accounts, sometimes called added value accounts, for which customers pay a monthly fee and receive a range of benefits such as fee and interest free overdrafts, mobile phone and travel insurance, vehicle breakdown assistance and home emergency insurance, in addition to the facilities of a full-facility free if in credit account. Customers could choose to purchase any or all of the individual elements of the package as stand-alone products.
Halifax, Lloyds and Bank of Scotland brands have offered or offer these accounts. Bundling products together in this way provides customers who need them with a range of benefits. It saves them time and effort from shopping around as they do not have to purchase each of the different products individually or at different times of the year with different renewal dates. It offers customers the convenience of a single point of contact when they need to claim on any of the insurance elements and they do not need to remember or carry around multiple phone numbers and insurance details when they need to make a claim.
24. Please explain the advantages of bundling and risks arising from bundling from both the bank's standpoint and the customer's. Describe how you mitigate against any risks arising from bundling.
LBG’s added value range has gone through the product governance process outlined in the response to Question 20. The relevant divisional committees monitor management information on a monthly basis looking at lapse rates and whether customers are using the products provided as part of the range. Alongside these measures LBG also uses ‘outcomes testing’ tools (outlined above) which help ensure products are being properly sold and sales processes remain appropriate. In addition, through our ongoing dialogue with the FSA we have made a number of improvements to our sales processes to ensure good customer outcomes.
The inherent risks arising from bundling are low provided products are properly designed and sold and customers’ needs are met. As outlined above, LBG has in place governance structures to seek to ensure proper design and monitoring.
Customer research informed us that customers appreciated the range of benefits offered in packaged accounts, and that they purchase them on the basis of financial value and convenience. Despite this, the nature of these products means there could be an increased risk of poor consumer outcomes by the way they are designed and sold if this not given careful consideration. In order to address concerns around product complexity, appropriateness and meeting customers’ information needs (being aware of capacity for absorption) we adopted the following principles.
Product Design
· Our range should be simple for customers to understand
· Products should have a few, high quality, benefits
· Our range should be targeted to ensure that customers buy packages with benefits they are eligible for and which are relevant to their needs
· The price and benefit information are provided on a consistent basis (e.g. monthly or annually) to make it easy for customers to compare and assess the overall benefit of the account
Sales Process
· Our range will meet customer needs through a sales process that explores customer demands and needs for all benefits
Post Sales
· Regular customer contact programme (at least annual) to remind customers of their benefits
· No requirement to register to qualify for key insurance benefits
· Targeted contact to customers no longer eligible for benefits (for example due to age) or not registered for benefits (to aid the claims process)
Since 2011 we have on our own initiative delivered the following changes ;
· Removal of the need to register for Mobile and Card Protection Insurance to qualify Redesign of sales processes for demands and needs
· Benefits Summaries detail key Exclusions and Limitations
· Reviewing of all exclusions and limitations to limit these are far as possible
· Removal of within franchise dual insurance
· Mailing to all customers who are near or past Travel Insurance eligibility
· Trigger mailings linked to key events, e.g. flights
· Annual Benefits, Limitations and Exclusions mailing to encourage customers to reassess their circumstances
· Ability to register online, as well as providing details of all benefits within the package and how to claim on them.
Many of these areas have since become either new rules within ICOBS and or industry best practice for others to follow. The position LTSB has taken on packaged accounts is a reflection of the lessons learned from PPI and the changes put in place within the business (as set out in our responses to Questions 19 and 20).
25. Please specify whether you have replaced PPI with another product or products. If you no longer sell PPI type products please confirm how you help consumers insure against the risks of accident and/or sickness and/or unemployment PPI was originally designed cover.
LBG stopped selling PPI in July 2010. LBG has not developed a direct replacement for PPI. LBG complies with the requirements of the 2011 PPI order and provides mortgage and cards PPI customers with annual reviews to help them understand what they have and whether it still meets their needs.
In our response to Question 8 we set out the statistics on the Protection Gap provided by the Swiss Re Term & Health Watch 2012. Similar estimates were found in the recent Treasury sponsored "Simple Financial Products" work that looked at how to fill the "protection gap" and rebuild customer confidence in these products.
This shows that the UK population is under insured and as a result there are very real risks if working people borrow money and then subsequently lose their jobs, die prematurely or are unable to work through illness for an extended period.
In May 2012 of this year LBG launched a new EEC product to meet the needs of customers while addressing their concerns about the price and complexity of other protection products. It should be noted that this product is different to PPI and is not a direct replacement.
EEC is a long term income protection product that replaces a proportion of the customer’s income in the event of accident, disability or sickness with the benefit paid, free of income tax to the customer. EEC pays out for a maximum of 60 months up until retirement. It is a standalone product and has regular premiums. LBG has taken a number of steps to ensure that the product delivers what customers’ need for example, the product is underwritten at point of sale so customers are fully informed of any limitations to the cover prior to the application being submitted. Similarly, LBG has ensured that there is clarity around definitions and that the key features documents are easy to read and understand.
Under EEC, LBG provides rehabilitation support to help customers return to the workplace. Under the terms of the EEC we also provide customers with an annual benefit statement to remind him/her of the benefit level they are entitled to under the terms of the product in addition to a prompt to tell LBG if their needs have changed.
The product was supported by Which? during LBG’s discussions on HM Treasury’s Simple Financial Products project for its simplicity, clarity around definitions and customer focus. LBG also thinks that the EEC product meets most of the requirements set out by HMT’s work on Simple Financial Products.
A number of mitigating steps have been put in place to ensure EEC is sold in the right way and to the appropriate target market. The product is sold on a fully advised basis by specially trained advisers who have undergone specific training for this product. This is to ensure there is a thorough assessment of customer need and affordability.
During this process LBG ensures full disclosure of the 60 month benefit so that customers’ understand the level of benefit there are purchasing. During the course of product development LBG identified groups that it would not sell to such as people close to retirement and the unemployed.
In line with LBG’s existing governance processes it has closely monitored sales of the EEC since its launch and engaged a number of senior committees to review management information to ensure products are being sold in the appropriate way to the right customers.
In the first month after launch LBG undertook daily verification and customer contact findings reviews. After a three months period LBG undertook thematic investigation of specific key product and sales process risks e.g. customer understanding of the 60 months benefit.
Data and management information from these investigations is fed back to LBG’s divisional risk Committees alongside product level management information such as claims rates, lapses, cancellations and complaints. This information is also reviewed and assessed by specialist monitoring forums which will support the work of the divisional risk Committee.
In keeping with LBG’s approach to governance, a full post implementation review was conducted after 6 months and the findings shared with the FSA. EEC will also be subject to annual product reviews going forward.
26. If you have replaced PPI, please specify what replacement products you have put in place, how they work and all key decisions in relation to them that were made by senior level product development or product approval committees, senior level risk or compliance committees, Senior Executive committees, Board committees and the main Board.
As set out in response to question 25 above, the EEC product was launched in May 2012 and in line with LBG’s product governance procedures it was signed off by a number of divisional risk committees including the Investment and Protection Governance Committee. This Committee is also being supported in its ongoing monitoring by specialist forums within the Group.
EEC was also signed off by the Group Product Governance Committee – the Group’s most senior risk committee chaired by the Chief Risk Officer and attended by members of the Group Executive Committee.
Understanding the degree of regulatory scrutiny around protection products LBG also held face to face sessions with the FSA in March 2012 to explain the product. During these sessions LBG took the FSA through the product proposition and customer research underpinning the EEC along with a) an overview of the planned advice process b) a summary of the controls LBG was putting in place to support the launch of the ECC; and c) the training plan for advisers. As committed prior to implementation, LBG has held had a number of subsequent conversations with the FSA post launch to share ongoing outcomes and plans to share the results of the EEC post-implementation review that was conducted 6 months after its launch.
4 January 2013
[1] CP07/11, paragraph 1.2.
[1] That is payable, in certain circumstances, in the event of disability due to accident or sickness.