Panel on mis-selling and cross-selling

Written evidence from Which? (SJ 015)

Executive summary

1. Which? believes that the prevailing culture within retail banks is focused on sales rather than on serving customers. This sales-based culture manifests itself in the many mis-selling scandals in the banking sector – including precipice bonds, endowment mortgages, ID theft insurance, risky investment funds and Payment Protection Insurance.

2. This evidence provides details of four recent mis-selling scandals involving the banking industry. It provides the background to these mis-selling scandals, the root causes of the mis-selling and the conduct of the banking groups following the emergence of the scandals.

Ø Payment Protection Insurance: This is the biggest mis-selling scandal in the history of retail financial services. Over £13 billion has already set aside by banks and building societies to compensate consumers. Which? first warned about the dangers of PPI in the late 1990s and have continually highlighted the poor value of this insurance and criticised the inappropriate sales practices.

Ø ID theft insurance: These insurance products were sold to consumers directly by their bank or in partnership with an insurance company. Important elements of these products provided very limited or no benefits to consumers. A number of major high-street banks entered into partnership with an insurance company so that when consumers phoned up to activate their credit/debit card they were given the hard-sell for these products.

Ø NHFA investment products: Consumers seeking advice about how to fund their long-term care were sold expensive and inappropriate investment products by NHFA.

Ø Barclays investment funds: Consumers seeking investment advice were sold inappropriate and excessively risky funds by Barclays investment advisers.

3. Which? believes that the root causes of these mis-selling scandals include:

Ø A prevailing sales-based culture within retail banks: This placed the achievement of sales targets over the long-term needs of the customer. Our recent investigation revealed that frontline staff are still under pressure to meet sales targets. [1]

Ø Remuneration policies for frontline staff: Inappropriate financial incentives for frontline staff played a role in virtually all mis-selling scandals in the financial services industry. Bonus schemes for PPI meant that advisers at Alliance and Leicester received six times as much bonus for selling a loan with PPI as for selling a loan without PPI.

Ø A tick-box approach to compliance rather than an emphasis on professional standards: Rather than asking whether a product or sales process provided fair treatment for the customer, some banks merely considered whether it complied with the detailed rules.

Ø Poor product design: Poor quality, complex and expensive products increased the risk of mis-selling. The features of some PPI and ID theft insurance products meant that they were not suitable to be sold to any consumers.

Ø Misleading or poor quality sales processes: Banks automatically included PPI when consumers asked for a personal loan. They failed to explain the product or its price to consumers and failed to ensure that it was suitable. Investment advisers recommended expensive and risky investment products without checking a consumer’s attitude to risk. Banks failed to monitor the quality of the sales process.

Ø Lack of effective competition: There was a significant lack of effective competition around the purchase of ancillary products such as PPI and ID theft insurance. There was a lack of competitive pressure on price as it was difficult to shop around and the price of the product was complex. Instead of competing for consumers by designing better value and better quality products, firms secured distribution by paying very high levels of commission to banks for selling their products. These commissions could reach 87% of the PPI premium.

Ø Banks ignored the warning signs of mis-selling: Banks failed to heed the warnings of mis-selling from consumer groups and politicians. Which? conducted research and warned of PPI mis-selling in 2002, 2004, 2005 and 2007. Banks also failed to learn from customer complaints and feedback. If banks had acted on these warnings, then mis-selling could have been prevented at a far earlier stage.

Ø A weak regulatory approach: The financial penalties imposed on banks for mis-selling PPI were a tiny proportion of the revenue gained from selling the products. Despite the widespread poor practice, the only senior executive of a large organisation to be the subject of enforcement action is the Chief Executive of Land of Leather – a sofa shop.

4. We are also concerned that once problems of mis-selling were exposed, some banks spent several years rejecting legitimate complaints. Some banks and their trade association, the BBA, challenged new rules from the Competition Commission and the FSA which would have led to improvements for consumers.

5. If the banking industry is to regain public trust then it must put an end to the succession of mis-selling scandals. In particular, we would highlight the following recommendations from our previous submissions to the Parliamentary Commission [2] :

Professional standards / code of conduct: As things stand, where an action is profitable, legal and common practice amongst other banks, shareholders and boards expect executives to continue despite potentially leading to disastrous outcomes for consumers. Going forward we need banks and their employees to behave better, not in response to a detailed rulebook but because it is part of their culture. A key element of reform is the development of a Good Financial Practice Code of Conduct, something that exists in almost all of the other recognised professions. This Code should have similar status in banking as Codes of Conduct have in the medical and other professions. Which? expanded on our proposals for a Code in our submission to the PCBS on 21st December.

Remuneration policies / clawback of bonuses: Remuneration incentives throughout banks, from senior executives to frontline staff, should be reformed to prioritise meeting the needs of customers over simply making sales. These schemes should be longer-term in nature with proper clawback of bonuses for inappropriate behaviour. Senior executives who presided over the mis-selling of PPI and other products should have their bonuses clawed back.

Oversight of product design and remuneration schemes: A named individual executive should be responsible for signing off the design of products and remuneration schemes for frontline staff. This would increase individual accountability and ensure that in the event of poor practice that individual would be subject to sanction by the professional standards body and the regulator.

Whistleblowing arrangements: Proper whistleblowing arrangements should be put in place so that frontline staff can raise concerns with senior executives, non-executive board members and the regulator about poor conduct or excessive pressure to sell.

Promotion of effective competition / changes to the regulatory approach: The FCA needs to do more to measure the value-for-money of financial products as this is a key indicator of weak competition and mis-selling. Competition regulators also need to be quicker to prevent the bundling of products if this is significantly distorting competition. The FCA must be more proactive and exercise its product intervention powers to do more to prevent toxic financial products from reaching consumers. It must also ensure that the financial penalties for mis-selling are far higher and take enforcement action against banks which fail to deal with complaints fairly. Its powers to secure redress for consumers must be expanded and utilised more often by the regulator.

Shareholder oversight: Shareholders need to ask more searching questions of the banks to prevent mis-selling. Banks should be required to disclose to shareholders information about the key mis-selling risks in their business and what action is being taken to prevent mis-selling.

Stronger collective redress powers: There should be new legislation to ensure that collective action can be taken on behalf of consumers who have lost out from mis-selling. This will make it clear to the banking industry (and their major shareholders) that if banks mis-sell products to consumers then they will be forced to pay fair redress to consumers.

Mis-selling scandal 1: Payment Protection Insurance

6. The mis-selling of Payment Protection Insurance is the biggest consumer financial scandal in the history of retail financial services. Over £13 billion has already been set aside by banks and building societies to compensate consumers and our analysis suggests that this amount will be insufficient. The banks claimed that PPI was designed to cover your debt repayments if you can’t work due to redundancy, ill health or accident. It was sold alongside unsecured and secured loans, mortgages, credit cards and store cards. PPI has been the subject of widespread mis-selling and has resulted in millions of consumers buying expensive insurance when some would never have been able to submit a successful claim.

7. The resolution of the problems in the PPI market has taken a long time. Which? first raised concerns about problems in the PPI market in 1998. Our research published in 2002, 2004, 2005 and 2007 highlighted the fact that banks continued to automatically include PPI when a consumer asked for a quote for a personal loan. Our mystery shopping found that banks failed to check whether the policies they offered were suitable for consumers and staff failed to highlight key exclusions and limitations of the insurance. Our analysis of the products found that the premium for the PPI was added to the loan – meaning that the insurance was very expensive. This was known as Single-Premium PPI, and in the most extreme cases the policy only lasted for five years, but the consumer would be paying the cost of the insurance back over the entire 25 year period of the loan.

8. An important issue for the PCBS to examine will be to determine why the PPI scandal was allowed to continue unchecked for such a long period of time. This will involve requesting information from the banks regarding what internal surveys and warnings were given about their sales practices. The PCBS should also request information from the banks about what their internal documents said about the profitability of PPI products.

The products

9. Payment Protection Insurance was sold on the basis that it protects a borrower's ability to maintain loan repayments should they be unable to keep up their repayments due to accident, sickness, or unemployment. PPI was generally sold alongside the credit, with both the same company typically arranging both the credit product and the insurance. Types of PPI sold included:

• Unsecured loan PPI (which includes motor loans, hire purchase and catalogue purchases/retail credit)

• Credit card PPI

• Overdraft PPI

• Store card PPI.

• First-charge mortgage payment protection insurance (MPPI)

• Second-charge mortgage or secured loan PPI

Revenues from PPI

10. The total level of premiums paid by consumers for PPI varied between £3 and £5 billion a year since the turn of the century. The Competition Commission found that in 2006, the total PPI premiums paid by consumers was £4.4 billion. [3] The breakdown of sales by type of PPI policy for 2006 is shown in the table below.

Table 1: PPI premiums by type of PPI - 2006

Type of PPI

Gross Written Premium

Share of total PPI premiums (%)

Personal loan PPI



First charge mortgage PPI



Second charge mortgage PPI



Credit card PPI



Motor loans



Retail Credit












11. The FSA stated that between 2005 and 2010, around £17 billion in total has been paid in PPI premiums (excluding first charge mortgages). [4] Altogether, we estimate that since 1996, over £40 billion of PPI has been sold. It should be noted that the total cost to consumers of PPI will have been greater then this due to the fact that in many cases the premium would have been added to the loan, resulting in extra interest payments by the consumer. Taking these into account, the total cost of PPI to consumers could be close to £50 billion.

Single premium and regular premium products

There were two predominant structures for selling PPI with credit products.

(a) Single premium PPI – in these cases, the premium paid for the PPI was added to the loan and paid back over the same period as the loan. This means a lump sum covering the cost of the insurance is added to the amount the consumer borrows, so they end up paying interest on both the insurance premium and the loan. This means that to pay for the PPI premium, a consumer could end up borrowing substantially more than they intended.

(b) Regular premium PPI – a regular monthly premium was paid for the PPI. This could either be a premium fixed at the outset for an unsecured loan, or a premium related to the total size of the outstanding balance at the end of each month on a credit card.

12. The table below shows the breakdown between single premium and regular premium PPI for the various different types of PPI. It shows that a substantial proportion of PPI sold with unsecured loans, second charge mortgages and motor finance was in the form of ‘single-premium’ PPI.

Table 2: Breakdown between single premium and regular premium policies

Type of PPI

Single premium (%)

Regular premium (%)

Personal loan PPI



First charge mortgage PPI



Second charge mortgage PPI



Credit card PPI



Motor loans



Retail Credit









Which?’s mystery shopping of the PPI market

13. Which? conducted mystery shopping research into various aspects of the PPI market in 2002, 2004, 2005 and 2007. This found significant problems with the operation of the market and the results of the mystery shopping are summarised below.

2002 research

14. In 2002, our research found the PPI market to be highly unfavourable to consumers, with many banks automatically including the product in quotes for personal loans. We also found that lenders were not ensuring that the PPI was suitable for the consumer purchasing this product.

15. Our fieldworkers were briefed that they either worked part-time or were off work owing to diagnosed back problems. Both these scenarios would have rendered them unable to claim on any PPI policy had they bought. Despite this, of the 96 quotes received in that survey, 69% did not give any explanation of the policy’s exclusion clauses, only 32% were asked about their employment situation, and none were asked about their health and medical condition. Therefore, in many of these cases, consumers would have been enticed into purchasing an insurance policy from which they would have never been able to benefit.

16. In 2003, we responded to an FSA consultation, outlining the results of our mystery shopping and warning them that PPI should be classified as a high-risk product.

2004 research

17. A follow-up study conducted in 2004 found a similar picture. In June and July 2004, we made 130 calls to 26 banks and building societies (five calls each) asking for a quote for a personal loan of £5,000 to be repaid over 36 months:

· Of the 116 calls that resulted in a quote, 56% (compared to 58% in 2002) produced a single quote including PPI. Only 38% of the quotes provided were given both with and without PPI (Nationwide and Smile were the only providers to do this in each of their five calls.) The remaining 6% gave the initial quote without PPI.

· Of the calls in which PPI was automatically included, 71% (compared to 67% in 2002) stated that PPI was included without the fieldworker having to ask.

· However nearly a third of calls leading to a quote including PPI (29%, compared to 33% in 2002) did not say that PPI was included, and the fieldworker had to subsequently ask.

18. When our fieldworkers enquired about a £5,000 loan over 3 years, in a number of cases they were not offered quotes for a loan without PPI. In cases where they were given a quote without PPI, the ‘Big-5’ banks (HSBC, RBS, Natwest, Lloyds or Barclays) quoted monthly repayments of between £157.90 and £168.68, and quotes ranged from £183.39 to £197.02 with the insurance. The cost of the insurance with all of the banks we spoke to was significant, working out at £25.13 per month at Natwest, £25.83 at RBS and £28.34 at HSBC. Non-Big-5 banks also charged a similar amount for the loans, with the Co-operative Bank offering monthly repayments of £157.90 without PPI and £184.85 with PPI.

19. Some of the salespeople who spoke to our fieldworkers overstated the benefits, put them under pressure to buy, or even told that they had to purchase PPI. Our fieldworkers were told:

· As a responsible lender we must ensure payments are being made – Abbey

· Because the loan is unsecured, insurance needs to be taken out – Alliance and Leicester

· I don’t have the ability to give you a quote without insurance. They are always quoted with - Egg

· We strongly recommend that you take the cover – Sainsbury’s Bank

· PPI would cover you in any eventuality – MBNA

· Goldfish tried to sell our fieldworker PPI, despite her explicitly saying that she worked less than 16 hours a week, making her unable to claim

· When our fieldworker told Clydesdale that she had been off work with a bad back, they failed to tell her that PPI would not cover her pre-existing condition.

2005 research

20. The problems of automatic bundling of the credit product and PPI were again apparent in the research that we conducted in 2005, which looked at the websites of 34 loan companies. We found that ten of them did not ask consumers whether they wanted to include PPI in their quote, but instead automatically added it on. These companies were the Co-operative Bank, Direct Line, Egg, HSBC, Liverpool Victoria, Lloyds TSB, Lombard Direct, Mint, Northern Rock and Smile.

2007 research

21. Our 2007 research again focused on the bundling of PPI with a £5,000 loan over 3 years. We made 50 independent calls to 10 loan providers (Abbey, Alliance & Leicester, Barclays, Halifax, HSBC, Lloyds TSB, Nationwide, NatWest, Northern Rock and Royal Bank of Scotland) to ascertain whether loan providers automatically included PPI in the loan quotes.

22. Of the 41 calls in which we received quotes (nine call lenders refused to quote, mainly because our researchers were not account holders), 24 lenders gave our researchers a quote that automatically included PPI, even though we had not asked for it. In a further 16 calls, the operator we spoke to gave quotes with and without PPI, and in only one case (HSBC) were we given a quote which did not include PPI without also being given a quote including it. NatWest and RBS were the worst offenders, always including PPI in their quotes. Nationwide always quoted both with and without PPI. The other lenders were inconsistent with the type of quote(s) they gave to our researchers.

23. On the internet, we found that Lloyds TBS, Tesco and NatWest initially quoted only with PPI – with the prospective customer having to click through to see payments without insurance.

Problems in the PPI market

24. In addition to our mystery shopping, Which? regularly conducted analysis of the products available in the market. We also submitted evidence to the Competition Commission inquiry and responded to FSA consultations on its regulation of the PPI market and the approach of firms to handling PPI complaints. In 2007, we included information about how consumers can complain about PPI in the magazine. In 2009, we launched an online tool enabling consumers to pursue a complaint with their PPI provider. Over 30,000 consumers have used this tool to submit a complaint to their provider. In 2012, we provided advice to the banks on how they could make the process of submitting a PPI complaint as simple as possible.

25. Based on our experience, we have identified the following problems for consumers from the operation of the market for PPI:

26. Poor product design: When PPI is sold alongside loans and finance agreements, the insurance premium is often added to the loan so that interest is paid on both the loan and the insurance. This increased the cost of the insurance to the consumer. If the consumer repaid the loan early or cancelled the insurance then the consumer would only receive a limited refund, or in some cases prior to 2007, no refund. Lenders did not make it clear that PPI policies usually only last for 5 years, so if the loan ran for longer than this then consumers end up paying interest on insurance that has expired. We have seen numerous examples of PPI policies which lasted for five years, whilst the loan lasted for up to 25 years. In some cases consumers ended up paying more for the policy, then the maximum benefits available under the disability and unemployment elements of the policy.

Case study: Mr and Mrs F took out a secured loan from Firstplus (part of Barclaycard). They were granted a loan of £91,500 over 25 years and were also advised to buy a PPI policy with a single premium of around £22,500. This meant that the total borrowed from Firstplus was £114,000. The PPI policy only lasted for 5 years although, although the consumer would be paying off the amount borrowed to pay for the PPI policy and interest over the 25 year term. This made the overall cost of the policy over the 25 year term to be over £52,000. The lender claimed that the policy was designed to cover the consumer if they became unemployed or were disabled. However, the cost of the policy exceeded the maximum benefits payable under these two elements.

27. Consumers mis-led at the point of sale: PPI was sold alongside the credit product, which led to a number of problems for consumers. As our research shows, for years many lenders gave consumers loan quotes already including PPI – automatically assuming that consumers needed to purchase PPI. They are thus led to believe that PPI is an integral part of their credit application, rather than an add-on product. They were frequently asked to make a quick decision whether to take PPI or not, with little or inadequate information about the product. Consumers were also misled to believe that PPI will improve their chances of obtaining credit. In other cases, consumers were put under inappropriate pressure to buy PPI and lenders failed to obtain clear consent from the consumer that they wished to purchase the policy.

Case study: Egg

Between January 2005 and December 2007, Egg sold PPI policies alongside its credit card to 106,000 customers, earning £16.7 million in premiums. Egg was fined £721,000 by the FSA. [1] The FSA found that 40% of Egg’s telephone sales of PPI breached the regulations by:

(a) failing to obtain clear consent to the purchase of the policy;

(b) failing to obtain clear and explicit consent from the customer to proceed with the sale on the basis of limited information only;

(c) inappropriate handling of customers’ objections to purchasing PPI, over-emphasising customers’ ability to cancel the policy in the initial free period, and in some cases putting undue pressure on customers to purchase PPI; and

(d) failing to give adequate responses to customers’ queries on the price of, or exclusions applicable to, PPI policies, and in some cases providing information that was inaccurate;

28. Mis-selling: PPI is a complicated product and consumers may struggle to understand the key terms and conditions and exclusions during the short sales process. In many cases, lenders failed to highlight the key terms, conditions and exclusions with consumers. Consumers were also frequently not asked about circumstances which would have left them unable to claim on their PPI policy including, where appropriate, pre-existing medical conditions or employment status. This could mean that consumers were unaware that the policy they purchased is not suitable for their employment status. Part time, fixed term, contract workers, or the self-employed were not eligible for some PPI policies.

Case Study: RBS/Natwest

The RBS/Natwest Personal loan protector insurance claimed to be able to "cover your monthly NatWest Loan repayments if you are unable to work for more than 14 days in a row as a result of involuntary unemployment, accident or sickness". However, the terms and conditions excluded some fixed-term contract workers from claiming on the policy and restricted the level of benefits for other workers on fixed-term contracts. This exclusion was not highlighted in the Policy Summary as a significant exclusion and was only mentioned on page 22 of a 36 page document.

29. Expensive product: All of these factors identified above contributed to PPI being a very expensive product for consumers. Adding PPI to a £10,000 personal loan repayable over 5 years cost an average of £2,800 – with some lenders charging as much as £3,800. The revenue gained from the PPI usually exceeded the amount of interest payable on the loan. The lucrative nature of PPI is demonstrated by the fact that only 11-28 per cent of premiums [5] are ever paid back in claims to policy-holders (depending on the type of PPI), compared to an equivalent figure of 82 per cent for car insurance. [6] The Competition Commission estimated that the distributors of PPI were achieving a return on capital of 490%. [7]

Root causes of the PPI mis-selling scandal

30. The Commission should examine the root causes of the PPI mis-selling scandal, which resulted in millions of consumers being mis-sold this insurance. Addressing these will require a packaged of measures which goes beyond the typical approach of supervising the sales process or providing consumers with more information. When there is a poor value and complex product which is sold by frontline staff who are given inappropriate incentives then there is bound to be extensive mis-selling. Which? believe that the root causes of PPI mis-selling include:

31. A prevailing sales-based culture within banks and a pursuit of short-term profit: This led to banks pursuing the sale of PPI in an effort to meet short-term profit targets. The culture and incentives at all levels within the bank were focused on meeting these goals.

32. A Tick-box approach to compliance rather than emphasising the importance of professional standards: Banks pursued a tick-box approach to compliance, rather than considering whether the approach to their product design and selling process was in the best interests of their customer. In their application for a Judicial Review of the FSA’s action on PPI, the British Bankers Association contended that the banks did not have to provide consumers with an oral explanation of the terms of the policy, but merely had to tell them that it was important that they read the policy summary. It is a strange attitude to use a regulatory justification for failing to explain the terms of your product to consumers and instead referring them to a document which could involve pages of small print.

33. Poor product design: Rather than concentrating on designing products to meet the needs of customers, the banks designed single premium PPI policies which were complex, expensive and inappropriate for many people. These products were complex to explain to customers and lenders frequently failed to provide adequate explanation of the price of these products or that the premium would be added to the loan. [8] In the most extreme cases, these single-premium products were so expensive that they should not have been sold to any consumers as the maximum benefit available from important elements of the policy exceeded the premium paid by the consumer. [9]

34. Accounting conventions: The way banks recorded the revenue from selling PPI also encouraged them to sell single premium policies. If they sold a single premium policy then they were allowed to include all of the revenue gained in year 1 of the loan.

35. High levels of commission payable to distributors: Banks and distributors chose the products which they were going to sell by the amount of commission they would receive. There was intense rivalry among insurance companies to secure access to customers, which manifested itself in high commissions paid to the lenders for distributing PPI. Typical commission rates for unsecured loan and credit card PPI were in the region of 50-80% of the premium. [10] Lloyds TSB received 87% commission for selling its customers one form of PPI – this meant that if the bank sold a policy with a premium of £10,000, they received £8,700 in commission. [11] For such an expensive product, this is the highest level of commission Which? has ever seen in the financial services market.

36. Inappropriate staff incentive schemes / sales targets: These were an important root cause of mis-selling – frontline staff were given strong incentives to sell PPI, regardless of whether the product was appropriate for the customer. Advisers at Alliance and Leicester received six times as much bonus for selling a loan with PPI as for selling a loan without PPI. If they did not sell PPI with over 50% of loans then they would see a quarter of the value cut off their bonus. HFC bank set sales targets of selling PPI with 80% of loans and advisers were eligible for bonuses if they reached this target. In another firm, targets of 50% PPI penetration were set for each member of staff for the award of these bonuses. Individuals failing to meet this target were not awarded any bonuses and were described as having ‘a training need.’ Furthermore, there was no clawback of the bonus if the customer subsequently cancelled the policy.

37. Inappropriate bundling of products and default settings. As evidenced by Which? research, for years many banks automatically included PPI when supplying quotes for personal loans. This was a deliberately confusing practice which could mislead or confuse consumers into purchasing products that the consumer may not want or need.

38. Weak competition: The bundling of the PPI product and the difficulty of consumers gaining information about the price of the product meant that there was weak competition around the price and quality of PPI. Consumers’ difficulty in shopping around for PPI or switching to an alternative policy meant that there was a wide dispersion of prices for similar PPI policies. A lack of fair refunds on single premium PPI meant that consumers faced significant and insurmountable barriers to switching. There was little advertising of PPI to consumers, with the competition for credit products focused on the APR, which excluded PPI.

39. Banks ignored warnings about problems with their products and sales practices from consumer groups and politicians: Our research demonstrates that Which? were warning of PPI mis-selling for years before banks and regulators began to take strong action.

40. Banks failed to learn from complaints and customer feedback: Even when consumers began to complain about PPI mis-selling, banks fobbed off or rejected legitimate complaints for years. In some cases, up to 30% of policies were cancelled by the consumer during the term of the policy. In other cases, banks failed to make use of management information to make improvements to their sales process. HFC failed to record information about the reason for a complaint about PPI. Although 27% of the rejected claims were due to the claim being excluded due to a pre-existing medical conditions HFC failed to act on this information.

41. Lack of interest from shareholders: Which? are not aware of shareholders raising concerns about the mis-selling of PPI. We believe that standards will only improve when shareholders become for more engaged in ensuring customers are treated fairly. The Commission could ask fund managers and shareholders to state whether they raised concern about PPI selling practices with the banks.

42. Weak FSA enforcement action: Even when the FSA began to take enforcement action against firms for mis-selling PPI, its fines were such a low proportion of the profit which firms gained from selling the product that they did not provide a proper deterrent against mis-selling. In January 2008, HFC bank was fined less than 0.4% of the revenue the bank gained from selling PPI. [12] Even the ‘record’ fine levied on Alliance and Leicester was just 3% of the revenue they gained from selling PPI over the period covered by the enforcement action. We note that Argos was fined more than twice as much for price-fixing of toys and games than the largest fine for PPI. [13]

43. Lack of individual responsibility: It was not clear which senior executives were responsible for signing off the policies and processes which led to the mis-selling of PPI. The only senior executive at a large institution who has been subject of an enforcement action by the FSA was the chief executive of Land of Leather – a sofa shop.

Conduct by the banks following the unfair treatment of customers and the mis-selling of PPI

44. In our view the actions of the banks following the exposure of the PPI mis-selling scandal, compounded the detriment to consumers. Many banks continued to sell these products for years after warnings were given by consumer groups, regulators and parliamentarians. However, we note that there is a mixed picture across the banking sector – for example, HSBC stopped selling single premium PPI in November 2007, whereas other banks continued for over a year. RBS stopped selling single premium PPI in November 2008, HBOS in December 2008 and Barclays in January 2009.

45. A banking industry with a culture focused on the customer would have acknowledged their past issues and quickly and efficiently put it right. However, some individual banks and their trade association, the BBA, took every opportunity to resist dealing with complaints fairly and properly. This undoubtedly delayed the payment of redress to consumers and resulted in unjustified bonuses being paid to the senior bankers responsible for presiding over the mis-selling. It also led to the growth of Claims Management Companies – who can take a substantial proportion of the consumer’s redress.

46. Rejecting legitimate complaints: When a consumer makes a complaint about PPI, the bank normally has eight weeks in which to deal with the complaint. If the bank rejects the consumer’s complaint then the consumer can take their complaint to the Financial Ombudsman Service (FOS). The percentage of cases resolved in favour of the consumer by the Financial Ombudsman provides an important assessment of the quality of banks complaints handling. If a high percentage of cases are being upheld in favour of the consumer, then this indicates that there are substantial weaknesses in the banks complaint handling. The table below shows that for several years, a number of major banking groups were experiencing a very high proportion of complaints being upheld by the FOS. This should have acted as a strong indication to the senior executives of those banks that there were major failings in the way their banks were dealing with complaints.

Table 3: Percentage of complaints resolved in favour of the consumer by FOS (General Insurance and Pure Protection up to the end of 2010 and PPI from the beginning of 2011)


Percentage of cases resolved in favour of the consumer by FOS

H1 2009

H2 2009

H1 2010

H2 2010

H1 2011

H2 2011

H1 2012

Barclays Bank Plc








Lloyds TSB Bank Plc








HSBC Bank plc








The Royal Bank of Scotland Plc








Santander UK Plc








47. Taking the FSA to judicial review and putting complaints on hold: After a long consultation process the FSA published proposals in August 2010 regarding the assessment and redress of PPI complaints. On 8 October 2010, the BBA began judicial review proceedings, challenging the FSA’s proposals. Lloyds banking group, Barclays, HSBC, Co-operative bank, and RBS/Natwest all stopped processing PPI complaints during the judicial review. [14] This meant that many consumers who complained to their bank between October 2010 and April 2011 had their complaints delayed. This also meant that when the banks lost the judicial review, there was a significant backlog of complaints to resolve – delaying the redress process for consumers. However, we note that Barclays chose to settle all complaints put on hold during the judicial review in favour of the consumer.

48. Challenging the Competition Commission’s ‘point of sale’ ban on PPI: The report published by the Competition Commission in January 2009 proposed prohibiting lenders from selling PPI alongside credit products within 7 days of the sale of the credit. Barclays and Lloyds banking group took the Competition Commission’s proposals to the Competition Appeal Tribunal. Whilst upholding the CC’s conclusions, the CAT ruled that it must in particular consider further the role and importance of a potential drawback to the prohibition, namely that it might inconvenience customers. The CC reported back in October 2010 that introducing the point-of-sale prohibition would benefit customers. [15] The actions of Lloyds and Barclays resulted in a delay of over 18 months in implementing the CC’s recommendations – the initial timetable envisaged all of its proposals being implemented by October 2010, and they were finally implemented in April 2012.

49. Resisting contacting consumers who might have been mis-sold PPI and lobbying to limit their liability for PPI complaints: Major high-street banks delayed contacting customers who might have been mis-sold PPI. Some banks also continue to lobby the Treasury and the FSA to limit their liability for PPI complaints. The FSA rules are clear that consumers have the longer of six years from the event complained about, or 3 years from when they should reasonably have become aware that they may have grounds for complaint. If the banks had proceeded to contact consumers in late 2010/early 2011, then we would already be towards the end of the redress process. Any attempt to limit access to FOS would also inevitably result in cases being taken to the small claims court – increasing costs for both consumers and the banks.

50. Inadequate provisions for PPI mis-selling: Banks and building societies have substantially under-estimated the amount they would have to refund to customers because of PPI mis-selling. Lloyds originally set aside £3.2 billion in Spring 2011, and this has subsequently increased to £5.3 billion by the end of 2012. Barclays originally set aside £1 billion and this has subsequently doubled to £2 billion. RBS originally set aside £1.05 billion and the total is now over £1.7 billion. Our analysis demonstrates that these provisions are still likely to be inadequate. For example, even with the increases in provisions Lloyds is likely to have to set aside more money by the end of March 2013. [16] The individual banks publish very little data which would enable their shareholders and outside organisations to understand how they have calculated their PPI provisions or to evaluate whether they are sufficient.

51. Limited clawback of bonuses: It is clear that some remuneration committees were not provided with details about the possible size of the PPI redress provision before they signed off bonuses. For example, the Chairman of the Lloyds remuneration Committee told the Treasury Select Committee that the remuneration committee only became aware of the size of the PPI provision in February 2011 – after they had already agreed on the size of bonuses for individuals for 2010 [17] . This was around six months after the FSA had published its policy statement on the assessment of PPI complaints. [18] Although the Judicial review was still ongoing at this point, it seems strange that the remuneration committee would not have been told about the possible size of the provision if the banking industry lost the case. The Lloyds Remuneration Committee’s report in the 2010 Annual report does not mention PPI.

52. In late 2011 and early 2012, Which? wrote to the Chairs of the remuneration committees at the five largest banks. The copies of the letters and the replies from the major banks have been submitted to the Commission. In February 2012, Lloyds banking group announced that it was clawing back bonuses from 5 senior individuals and 8 other members of staff. However, senior executives at Lloyds banking group who were in post during the mis-selling of PPI are still scheduled to get bonuses of £3.6 million in Spring 2013. Which? believes that these bonuses should not be paid out.

Total provisions made for the mis-selling of PPI

53. Which? have gathered publicly reported information on the level of provisions for PPI mis-selling which have been announced by the larger high-street banks and building societies. At the end of 2012, the total provisions exceed £13 billion. Up to the end of October 2012, a total of £7.5 billion had been paid back to consumers. [19]

Table 4: Total publicly reported PPI provisions as at end 2012

Total PPI provision - £ million

Lloyds Banking group


Bank of America (MBNA)*




Capital One*






Northern Rock


Alliance and Leicester




Principality Building Society


Welcome Financial Services


Co-operative bank


Yorkshire bank / Clydesdale bank








Source: Which? calculations from information gained from bank Annual reports and results announcements. *HSBC, Capital One and Bank of America report in US dollars. We have converted these provisions into sterling at the prevailing exchange rate

Mis-selling scandal 2: ID theft insurance / Card Protection insurance

54. Which? has led a strong consumer campaign questioning the efficacy of both Identity (ID) Theft and Card Protection Insurance products due to both the poor value of the products sold (unnecessary policy features and issues of claim eligibility), and the coercive techniques employed to sell them (misleading statements concerning the value of the product, risk of ID theft and the use of sales targets with an emphasis on short-term profitability). We argue that the root causes of the mis-selling of these products included:

· Poor product design,

· An aggressive sales culture and use of inappropriate staff incentive structures,

· The role of banks in providing sales channels and failing to consider the quality of these insurance products, and sales techniques used.

Identity Theft and Card Protection Insurance

55. Which? has led an ongoing campaign questioning the efficacy and value for money, as well as the coercive techniques used to sell both ID theft and Card Protection insurance products. In July 2009, we said that "these policies make banks a fortune but we think they’re a waste of your money" [20] In October 2010, we said "Banks, building societies and the companies selling these policies are playing on our fears and making money from our concern about ID theft and bank fraud. They’re selling us expensive policies we don’t really need, and which we’re unlikely to ever claim on." [21]

56. These concerns were reiterated during the Financial Services Authority’s (FSA) investigation into the conduct of Card Protection Plan Limited (CPP), a regulated entity which offered ID theft and Card Protection Insurance as part of their core products in the UK. [22] The investigation resulted in CPP receiving a fine of £10.5 million fine for breaching principles 3, 6 and 7 of the FSA Principles for Businesses when selling Card and Identity Protection to customers. The mis-selling arose with regard to two particular products:

· Identity (ID) Theft Insurance, which provides access to various monitoring tools and reports designed to limit customer’s exposure to identity theft, insurance for legal fees, specified out of pocket expenses attributed to the identify fraud as well as other features including, but not limited to, caseworker assistance in the event of identity fraud and insurance for legal fees.

· Card Protection Insurance / Card Protection Plans, which provides insurance cover against the cost of any unauthorised use of a customer’s card as well as other features including, but not limited to, insurance for unauthorised calls made on a customer’s lost or stolen mobile phone, emergency loans and delivery of cash to customers who have lost their cards abroad.

57. The FSA’s investigation into CPP revealed that the company received a large proportion of what consumers paid for ID Theft and Card Protection insurance products, with the actual premium comprising of a small proportion of the product cost:

· CPP’s Identity Protection product cost approximately £84 per annum (depending on the business partner and when it was sold). Of this amount, CPP received approximately £68 for it’s "insurance intermediary services", and paid a specified percentage of that to relevant business partners (in some cases as much as 50%) for introducing their customers to CPP, and a premium of approximately £16 (inclusive of insurance premium tax) which covered the provision of all insurance and non insurance features of the product.

· CPP’s Card Protection Product cost approximately £35 per annum (depending on the business partner and when it was sold). Of this amount, CPP received approximately £34.40 for it’s "insurance intermediary services" and paid a specified percentage of that to relevant business partners (in some cases up to 60%) for introducing customers, and a premium of approximately £0.60 (inclusive of insurance premium tax) which covered the provisions of all insurance and non insurance features of the product.

58. Which?’s investigation into the limited effectiveness of ID theft Insurance and Card Protection insurance highlighted the following:

59. Unnecessary features contained within the policy, such as the "pre-notification cover" which claimed to provide customers with up to £5,000 of cover for unauthorised transactions before they notified the bank that their card had been stolen. This was included despite consumer liability being limited by the Consumer Credit Act 1974 to just £50. For the few transactions which fall outside of this legislation, customers are only liable for more than the first £50 if they have been "grossly negligent". In the case of CPP, the FSA remarked that this policy aspect was deemed "of very limited value" to customers. The plan also claimed to offer consumers protection of up to either £50,000 or £100,000 which occurred after they had notified the bank that their cards had been stolen. However, consumers are not liable for unauthorised transactions after they have notified their bank that their card had been stolen. Consumers would never benefit from this aspect of the product.

60. Policies offering credit file access may not reveal a complete picture of data being held on consumers as many policies included access to just one of the three credit reference agencies (CRAs) in the UK.

61. Issues of claim eligibility. For example, while replacement cash cover is offered as a key part of ID theft insurance policies, these often contained several exclusions with a high burden of proof on the consumer in relation to the loss of cash. Furthermore, Which? has drawn attention to the coercive techniques which have been employed by companies to sell these products:

Complaints by customers about being mislead about the poor value of ID Theft and Card Protection Insurance products.

The FSA’s investigation into CPP found that there was a systematic failure to "inform customers of the very limited circumstances in which customers would need the Card Protection cover, and overstated the risks and repercussions of identity theft in its sales and its Customer Documentation." [1]

62. We received complaints from consumers with regard to the "hard sell" they received from insurers when activating a new credit or debit card. [23] This often involved salespeople failing to give a fair and balanced picture regarding ID fraud to push consumers to purchase products. The FSA found that CPP used a series of misleading and unverifiable statistics to exaggerate the risk and consequences of ID fraud. Furthermore, customers were also not necessarily aware that they were speaking to third party companies and not their bank directly.

An investigation of customer experiences with ID Theft and Card Protection Insurance products unearthed the following examples of the "hard sell":

Case Study 1:
A couple were alerted to fraudulent use of their Barclaycard bankcard online and were subsequently sold a CPP insurance package over the phone when following activation instructions on their new card. They said "We felt vulnerable after what happened and feel we were coerced".

Similar practises were also identified by the FSA during its investigation into the conduct of CPP, sales staff utilised scripts when speaking with customers designed to "heighten the customers concern about identity theft" and overemphasise the probability of risk of ID theft, using statistics which were deemed "often misleading or unsupportable". [1]

63. Furthermore, Which? has previously drawn attention to the role of an a prevailing sales culture comprising of the use of sales targets and a remuneration structure which rewards short-term profitability, at the expense of the customer, inappropriately incentivised mis-selling and other poor practices. The FSA found that CPP "encouraged sales agents to be overly persistent in persuading potential customers of both products to purchase them even after the customers had made it clear that they did not wish to buy them and gave its sales agents targets for successfully dissuading customers who contacted CPP to cancel their policies" [24]

Case Study 2: After signing up to ID theft insurance a Which? member found correspondence with the insurers difficult and the product features confusing. "I could not gain access to the website with the temporary password and therefore telephoned their Theft Helpline, which cost about £2". By the time the member had obtained a password his 21 day cancellation period had expired. He writes "My wife and I can now access the site which is of little value and gives little information. We would not have become involved with this type of insurance if we had not been overwhelmed by the sales pitch".

In the case of CPP, the FSA observed that the use of cancellation turn around targets and incentives increased the risk of sales agents using inappropriate objection handling techniques to discourage customers from cancelling their policies. [1] Furthermore, the FSA observed that CPP’s sales agents had inappropriately persuaded customers to buy products on the basis that customers could cancel them during the cooling off period. [2] This led the FSA to conclude that, "CPP’s sales process promoted an excessive focus on sales, revenue and commercial objectives at the expense of treating customers fairly." [3]

Root Causes of ID Theft and Card Protection Insurance product mis-selling:

64. Which? submits that the proliferation and mis-selling of ID Theft and Card Protection insurance can be attributed to a number of root causes:

65. Poor product design: As demonstrated, ID Theft and Card Protection products were poorly designed and inherently misleading as consumers are already covered for losses under relevant legislation. The FSA observed that "CPP exposed a very large number of customers to an unacceptable risk of buying products that they did not want or need." [25]

66. Misleading sales processes: As outlined above, Which? believes that the prevalence of an aggressive sales culture and use of staff incentive structures in firms offering ID Theft and Card Protection Insurance significantly attributed to the mis-selling of these products by promoting short-term profitability to the detriment of consumers. Sales agents followed scripts which misled consumers about the risk and consequences of ID fraud and emphasised elements of the cover which were useless to consumers.

67. Banks passing on their customers details to enable the selling of these policies: Finally, Which? asserts that responsibility also lies with the banks in the process of mis-selling as they failed to consider the quality of these insurance products, and sales techniques used. Companies selling ID theft and Card Protection Insurance products had often relied upon access to customers through partnerships with Banks. For example, CPP relied upon on "introduced sales", where bank customers were funnelled through during process of "card activation" or "safe receipt" of debit/credit cards.

68. Banks were given financial incentives in exchange for access to these sales channels. In the case of CPP, a commission (at times as high as 50-60% of what CPP received for "insurance intermediary services") was paid to banks and other business partners for each original product sale, and a further commission each time a customer renewed their policy. Which? argues that the conduct of these banking institutions contributed to the mis-selling of policies which led to detrimental outcomes for consumers. A number of major high-street banks were involved in this process and Which? are currently investigating the extent of their relationships with ID theft insurance providers. We will provide a dossier of evidence to the Commission when these investigations are complete. The Commission could ask these banks what information they had about the policies their customers were being sold and whether they realised that important elements of the products would not provide any benefits to their customers.

Mis-selling scandals 3 and 4: NHFA and Barclays bank – investment products

69. This section summarises two instances of mis-selling of investment products, predominantly to "vulnerable customers" including the elderly and those nearing retirement, in relation to NHFA Limited (NHFA) and Barclays Bank Plc (Barclays).

Examples of mis-selling by NHFA/HSBC and Barclays


70. On 2 December 2011, the Financial Services Authority (FSA) imposed a fine on HSBC of £10.5 million in relation to inappropriate investment advice and sales of asset-backed investment products provided by NHFA (acquired by HSBC in July 2005) o it’s customers between 15 July 2005 and 20 July 2010. This breached Principle 9 of the FSA’s Principles for Businesses as well as a number of rules in the Conduct of Business (and its predecessor, Conduct of Business Sourcebook) found in the FSA Handbook. [26]

71. NHFA specialised in providing independent financial advice to customers who were either receiving care or about to enter long-term arrangements. The majority of NHFA’s customers, described by the FSA as being "vulnerable customers", were elderly (the average customer age was almost 83 years old) and relied on investments to fund their care costs. As a result of NHFA advice, customers were left with only a small amount of funds readily available to them and in many cases proceeded to take high levels of withdrawals from the invested assets during the early years to meet care costs.

72. The FSA identified that the failings in the suitability of advice were "serious, systemic and persisted over a long period of time" and led to a significant number an unacceptable level of risk of mis-selling leaving customers potentially suffering financial detriment. For example, a third party audit of 421 NHFA customer files regarding sales made between April 2004 and July 2010, identified unsuitable sales in relation to 87% (or 367) of customers where one or more asset-backed products were sold. 74% (625 of 841) of asset-backed policies sold were deemed to be unsuitable for the consumer. [27]


73. On 14 January 2011, the FSA imposed a financial penalty on Barclays of £7.7 million for breaches of Principle 9 of the Principles for Businesses and associated rules in relation to Barclays’ sales of Aviva’s Global Balanced Income Fund (the Balanced Fund) and Global Cautious Income Fund (the Cautious Fund) between July 2006 and November 2008. [28]

74. Customers who had been mis-sold included the elderly and those nearing retirement seeking to generate greater incomes than available from deposits but who had limited or no experience of stock market investments and their inherent risks. The FSA concluded that many of these "vulnerable customers" were drawn to the Funds’ "enhanced income objective", but due to their inexperience may not have understood the risks involved due to the Funds’ complex characteristics. This led the FSA to conclude that "Barclays customers were exposed to an unacceptable risk of unsuitable sales and a number of unsuitable sales were made." [29]

75. The FSA concluded that a large number of investors were placed at risk and the potential impact was significant. During the Relevant Period, a total of 12,331 customers invested in the Funds with investments totalling £692 million.

Root causes of the mis-selling of the investment products

76. Which? argues that the root causes of mis-selling by both NHFA/HSBC and Barclays can be attributed to the following poor industry practises:

Inappropriate products

77. In the case of NHFA, the FSA concluded the asset-based investments recommended may result in "potentially no benefit to the customer compared to retaining the funds in a bank or building society deposit account." [30]

78. This is due to a number of factors, including a failure to take into consideration the tax status of customers (resulting in exposure to higher liabilities), the impact on reduction of capital due to high levels of early withdrawals and product charges, as well as charges incurred resulting from customers life expectancy being less than the minimum recommended term for the investment. [31]

79. There was inadequate diversification of investments and savings plans with little or no consideration given to the use of, or explanation for discounting of, other suitable forms of investments (for example OEICs/unit trusts, ISAs, National Savings, and fixed rate deposits). [32]

80. In the case of Barclays, the FSA concluded that the Funds were incorrectly promoted and sold to consumers despite being unsuitable to their circumstances. Customers were misled by the "enhanced income objective", and were unaware that the funds were inappropriate for those wishing to invest for capital growth. This was further compounded by the mislabelling of the Balanced Fund as "balanced" instead of "adventurous" during the introduction of a new process of risk rating. [33] Furthermore, customers were found to be unaware of the inherent risks of the product as focused was made only on the potential benefits.

Commission based incentives

81. Which? argues the use of commission based incentives in the sale of these investment products also had a direct role to play in the mis-selling of financial products. Information Which? has received from customers who have been mis-sold these products by NHFA showed that commissions were received by advisers as a result of the sale. Not only were consumers’ worse off as a result of the inappropriate nature of the product sold, but they also paid a cost indirectly through the commissions charged. The uncontrolled use of such incentives led to the growth in sales of these products regardless of the potential risks to the highly vulnerable consumers involved.

Poor staff training

82. In addition, the FSA’s investigation into Barclays highlighted the impact of inadequate staff training to mitigate the risk of suitable sales of the Funds. In particular, the lack of clear identification of which types of customers the Funds were best suited for and a failure to identify that the product was inappropriate for customers seeking capital growth. Nor did it explain the detrimental consequences to capital declining when withdrawing income from the Funds during a market downturn. Consequently, the FSA concluded that "the training material gave advisers a misleading impression of the risks involved". [34]

83. Furthermore, Barclays’ own training and competency reports throughout 2007 to 2008 showed ongoing poor scores and breaches of Barclays’ sales standards relating to completion of sales documentation. The FSA concluded that Barclays failed to take prompt and remedial action on ensuring appropriate documentation on sales of Funds. [35]

84. The FSA concluded that both NHFA/HSBC and Barclays failed to put in place adequate procedures for monitoring sales of the aforementioned products and funds which resulted in a failure to promptly identify and investigate potentially unsuitable sales. [36]

Improper assessment of consumers’ attitude to risk (ATR) and recommending excessively risky and inappropriate products which did not meet their objectives

85. In the case of NHFA, the FSA’s investigation found that there was no consistent approach to assessing customer’s ATR, or use of a suitable risk profiling questionnaire. Due to the age of NHFA’s customer base, many had limited means or opportunity to make up any financial loss resulting from an unsuitable sale and risked impacting on their ability to fund care arrangements. [37]

86. In the case of Barclays, customer suitability was not taken into proper consideration when selling the product to largely vulnerable consumers. Barclays failed to adequately identify which customer type would be most suitable for the product, which led to a number of vulnerable customers being exposed to "a material risk of unsuitable sales". [38]

Lack of adequate information in customer literature

87. The FSA indentified that the Barclays fund product brochures and other documentation given to Barclays’ customers contained inadequate information and statements which could have misled customers about the nature and levels of risk involved. [39]

88. Similarly, the suitability letters issued by NHFA advisers to their customers failed to provide information tailored to the circumstances of the individual customer, therefore failing to adequately explain the reasons for product suitability. The FSA found that such letters contained a number of inaccuracies, and failed to give balanced information by focussing unduly focusing on product benefits and insufficient warnings about probably disadvantages. Lastly, standard appendices used in correspondence included out-of-date or irrelevant information. [40]

Conduct following the breaches

89. Following the fines imposed by the FSA both firms were required to provide redress to the consumers affected by the mis-selling. However, Which? are concerned that the lack of independent oversight of these processes could risk consumers being offered inadequate redress. For example, in the case of one consumer affected by the Barclays mis-selling, the amount of redress offered assumed that instead of the consumer receiving the inappropriate advice they would have invested in a product where they would have received a return equal to the Bank of England base rate + 0.5% and still have lost 7.5% of their capital. The FSA and Barclays have been unable to provide clear justification of why this method of calculating redress was chosen.

27 December 2012

Annex A: PPI – timeline of events


Which? published article highlighting the protection market, and raising concerns about PPI


Government decides to widen the scope of the FSA


Which? published article highlighting PPI mis-selling and that it was being automatically included when consumers asked for a quote for a personal loan.

We said: "The results of our investigation are shocking. As well as mis-selling we concluded that the Association of British Insurers (ABI) and General Insurance Standards Council (GISC) codes are being flouted. The GISC told us it considers breaches of its code as misselling, and is interested in our findings."


Which? responds to the FSA consultation, including the results of our 2002 mystery shopping and stating that PPI should be classified as a high-risk product.


Which? conducts further mystery shopping of PPI.

January 2005

FSA takes on the regulation of the sale of insurance

26 January 2005

FSA - a review of PPI is one of the thematic priorities set out in the FSA's 2005/06 Business Plan for the first year of general insurance regulation.

February 2005

The Treasury Select Committee report Credit card charges and marketing recommends that "once the transfer of responsibilities for insurance regulation to the FSA has been completed the FSA should begin an investigation into the selling of Payment Protection Insurance."

September 2005

CAB Super Complaint is issued to the OFT and report ‘Protection Racket’ is published

November 2005

FSA issues its first report as part of its thematic review of PPI, following visits and mystery shopping – poor selling practices and lack of compliance controls.

The FSA Chief Executive and Chairman are questioned on this report by the Treasury Select Committee on 8 November 2005:

Q73 Chairman: Sir Callum, you came out with a paper on payment protection insurance on Friday and I want to ask you a few questions about that. Around 20% of the firms visited by the FSA provided for no refund on early cancellation of a payment protection insurance policy. This means that the consumer can pay several thousand pounds for a single PPI policy and receive no refund if they settle the loan early. What plans do you have to stop that practice?

Sir Callum McCarthy: First of all, I think that the results of both the thematic work and of our mystery shopping in relation to PPI showed that this is a worrying and real problem. The concern that we have is that in particular a number of providers of this product, which is not a bad product, inherently-it deals with the real requirement to give people the insurance they need, dealing with loans-not particularly in relation to mortgages where the position is quite good, but in other respects, were not giving the information that the customer needed. If it is made clear that by making a single payment you risk losing it or wasting it if you repay the loan early or change the loan, as long as that is explained properly that is a decision for people. The worrying thing was that people were not having that explained.

Q74 Chairman: This is your own document, and you say you consider no refunds are made under unfair terms in Unfair Terms in Consumer Contract Regulations, 1999.

Sir Callum McCarthy: If I try to deal with the main questions that we were concerned with, one was that exclusions were not properly described and particularly in people in terms of age exclusions and self-employment, so there were a number of instances where products were sold and the person could not subsequently make a payment against that product, and that is inexcusable. There were a number of instances in which the question of the risk associated and what would happen in particular circumstances-and single payments is a very good example of that-were not explained, and we need to get better explanation. And there is then a legal question which we have to do more work on, and I will have to come back to you with a note on the legal question because I would not give you the proper legally correct answer if I tried to give it now, but I will do so, if I may, Chairman.

Q75 Chairman: Yes. You indicate under your Treating Customers Fairly principles that product providers should consider how the products meet their personal needs and expectations and the new Conduct for Business Rules require the firm making a personal recommendation to ensure that the product is suitable for the customer. Given that over 70% of unsecured loans are settled early-and that was indicated in a DTI Press release in December 2003-and you recognise that many customers are likely to need flexibility, does this mean that many single [premium] PPI policies are failing to meet the current customers' needs under the Principles of Treating Customers Fairly and your suitability rules?

Sir Callum McCarthy: I think it is clear that many of them have sold inappropriately, yes.

Q76 Chairman: There is a need for urgent action, and I am a bit disappointed in terms of your recommendations because the Treasury Committee recommended that the OFT conducted investigations into the PPI as early as December 2003 and indeed we went on, in January 2005, following the transferral of responsibilities for the general insurance regulations, to ask the FSA to conduct an investigation. Your press release states, "Having put the industry on notice to improve its sales practice, the FSA plans to undertake a second round of thematic work early next financial year to check that compliance levels have improved." It seems as though this problem is going on and on and there is not much done about it. Let me give you a personal example. I went into my bank to get a small loan added and I was asked if I wanted payment protection insurance, to which I said no. The next week I get eight separate letters from the bank asking me to sign up for PPI-eight letters as a result of that. I did nothing about it, but there was a heavy sell here.

Sir Callum McCarthy: Chairman, I absolutely agree with you that this is a major problem. On Friday we indicated that it was, we have said that we are going to do further work on it. I am glad to say that both the BBA and the ABI acknowledge that this was something that they had to deal with, and the other thing that we have made clear is that we are initiating enforcement action against a number of firms where, from the initial work that we have done, we believe that there is a case for further investigation with a view to taking action against them because of the way that they have behaved. Given that we have been responsible for this for less than a year I think that we have tackled it firmly and been determined to get the evidence to make sure that we understood it, and as soon as we had that evidence have taken action.

Q77 Chairman: But if some firms were named, so that customers could have a chance. After all, if it is conflicting with your Treating Customers Fairly regulations and the legal implications here, then something needs to be done. It is to try to get an urgent response from you this morning that I am asking these questions.

Sir Callum McCarthy: Chairman, you know that our practice-and I think it is the correct practice-is not to name firms until we have amassed the evidence and taken it through due process.

Q78 Chairman: But if you work at that urgently.

Sir Callum McCarthy: We are attacking this as a problem that we regard as a major and important problem that we are determined to deal with. Could I just add one other thing? The other element of it, as well as the mis-selling, is that it is a question which I would hope the OFT will deal with with equal determination, but that these products should be bundled up with the original loan because they are both questions of bundling which are important.

Q79 Chairman: Also your document indicates that you have found examples of commission rates as high as 80% payment protection insurance premiums. Does this indicate that there could be a lack of competition in the market that OFT could investigate along with what you are suggesting there?

Sir Callum McCarthy: It is clear that the cost of the PPI can vary by a factor of three, ie people can pay either £300 or £1,000 for the same degree of protection. So it is clear that there is not proper competition in the market, you have that degree of discrepancy. The thing that worries us about the very high level of commissions, if you are paying those very high level of commissions you have to be particularly careful to make sure that you have internal systems and controls to prevent the product being mis-sold, and the evidence that we have from limited thematic work and mystery shopping does not give us confidence at all that there are those systems and controls in place.

September/October 2006

FSA Fines smaller firms for mis-selling

October 2006

FSA issues report finding more evidence of poor compliance

October 2006

OFT issues a report on PPI and consults on its proposal to refer PPI to the Competition Commission

January/February 2007

FSA imposes fines on major providers for not treating customers fairly

February 2007

OFT makes formal referral of PPI to the Competition Commission

April 2007

Competition Commission publishes an issues statement

November 2007

Competition Commission issues consultation – it will focus on distribution

HSBC becomes the first major bank to stop selling single premium PPI policies alongside personal loans

January 2008

Competition Commission publishes the ‘profitability of PPI’ working paper

January 2008

FSA imposes more fines for not treating customers fairly

March 2008

FSA introduces comparative tables for PPI

April 2008

Competition Commission publishes ‘barriers and benefits to search’ working paper

April 2008

Competition Commission publishes ‘entry and expansion’ working paper

May 2008

Which? publishes research into LPPI showing that many people may have been sold a policy they will never be able to claim on

July 2008

FOS formally refers PPI to the FSA under the wider-implications arrangements

10 September 2008

Which? publishes research into credit card PPI showing that 1.3m people mistakenly believed they would be approved credit if they took PPI

24 September 2008

Competition Commission publishes revised administrative timetable for its investigation into the PPI market, with the decision on remedies postponed from September to October 2008

30 September 2008

FSA publishes an update on its review of the sale of PPI

October 2008

Alliance & Leicester fined a record £7m for mis-selling PPI.

November 2008 – January 2009

RBS, HBOS and Barclays all stop selling single premium PPI policies alongside personal loans, although some continue to sell regular premium PPI policies alongside personal loans through a variety of sales channels.

January 2009

Competition Commission recommends those selling a loan should not sell PPI at same time. Barclays, supported by Lloyds, lodges objection to this ‘point of sale’ remedy to the Competition Appeal Tribunal. Which? calls on them to withdraw the appeal and writes to the tribunal to highlight our concerns.

February 2009

The FSA writes to all firms asking them to stop selling single premium PPI alongside personal loans by March 2009.

Which? sets up a simple to use, on-line complaints tool to enable consumers to send a complaint about PPI directly to whoever sold it to them

July 2010

Barclays stops selling all forms of PPI alongside personal loans. Lloyds stops selling all forms of PPI.

August 2010

The FSA published policy statement 10/12, outlining the approach which firms should take to the assessment and redress of PPI complaints.

October 2010 – December 2010

Major banks announce that they will be putting consumers complaints on hold while they request a judicial review of the FSA’s policy statement 10/12.

January 2011

The BBA goes to court with the Financial Services Authority (FSA) and Financial Ombudsman (FOS) over complaints handling processes for PPI. Which? calls on the banks to withdraw from the review

20 April 2011

Judge rules against the BBA and orders them to pay costs.

5 May 2011

Which? publishes an advert in The Times calling on members of the BBA to admit defeat over the PPI judicial review. Lloyds withdraws from the legal proceedings and announces a provision of £3.2 billion to cover the cost of PPI redress.

9 May 2011

The BBA announces it would not appeal the ruling of the high court, paving the way for banks to continue to compensate consumers if they were mis-sold PPI.

[1] Which?, “Here to help?, Bank staff reveal the truth about working for Britain ’s big banks”,

[2] Which? submission to the Parliamentary Commission on Banking Standards, 24 th August 2012 ; Which? supplementary submission to the Parliamentary Commission on Banking Standards

[3] Competition Commission, Market investigation into Payment Protection Insurance, Provisional findings report, 5 th June 2008 , para 2.23

[4] FSA, Consultation Paper 10/6, Annex 3, para 10




[7] Competition Commission, Market Investigation into Payment Protection Insurance, June 2008

[8] FSA, The sale of Payment Protection Insurance, thematic update, September 2007

[9] See the Firstplus (part of Barclaycard) case study presented above and the Lloyds TSB insurance product in Harrison and another versus Black Horse; [2011] EWCA Civ 1128 , 12 th October 2011

[10] Competition Commission, Provisional findings, June 2008, para 6

[11] Harrison and another versus Black Horse; [2011] EWCA Civ 1128 , 12 th October 2011



[14] ; Santander were the only large bank to keep processing complaints during the judicial review.



[17] Treasury Committee, Oral evidence taken on Tuesday 12 th June 2012 , Q88-Q92

[18] The FSA published Policy Statement 10/12 on 10 th August 2010


[20] Which?, July 2009

[21] Which?, October 2010

[22] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 8

[1] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 1


[1] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 9-10

[24] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 2

[1] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 14

[2] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 2

[3] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 2

[25] Financial Services Authority, Final Notice to Credit Card Protection Plan Limited (FSA Reference Number 311489), 14/11/12 , pg. 3

[26] Financial Services Authority, Final Notice to HSBC Bank Plc, (FSA Reference Number 114216 ), 02/12/12 , pg. 1

[27] Financial Services Authority, Final Notice to HSBC Bank Plc, (FSA Reference Number 114216 ), 02/12/12 , pg. 2-3

[28] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 1

[29] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 2

[30] Financial Services Authority, Final Notice to HSBC Bank Plc, (FSA Reference Number 114216 ), 02/12/12 , pg. 7

[31] Financial Services Authority, Final Notice to HSBC Bank Plc, (FSA Reference Number 114216 ), 02/12/12 , pg. 2

[32] Financial Services Authority, Final Notice to HSBC Bank Plc, (FSA Reference Number 114216 ), 02/12/12 , pg. 7

[33] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 5

[34] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 2, 7

[35] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 12

[36] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 2

[37] Financial Services Authority, Final Notice to HSBC Bank Plc, (FSA Reference Number 114216 ), 02/12/12 , pg. 7

[38] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 7

[39] Financial Services Authority, Final Notice to Barclays Bank Plc , 14/01/11 , pg. 11

[40] Financial Services Authority, Final Notice to HSBC Bank Plc, (FSA Reference Number 114216 ), 02/12/12 , pg.3

Prepared 10th April 2013