Parliamentary Commission on Banking StandardsWritten evidence from RBS
Introduction
RBS Group (“RBSG”) is pleased to assist the Commission with its considerations. Due to the short timescale for response and the scale of the information requested, covering a wide range of data and a 12 year spectrum, it is not possible for RBSG to respond in detail on every point raised. We have, therefore, focused on addressing the key issues highlighted in the evidence request to Stephen Hester, RBS Group Chief Executive and in providing the key data requested.
This response to the Panel on mis-selling and cross selling of retail financial products should be read in the context of our previous submissions to the Commission and the recognition by RBSG that, despite progress in becoming more customer focused, much more needs to be done. Indeed, as we have indicated to the Commission, in the decade preceding the financial crisis, the banking industry expanded too fast, with too much focus on income and profit, and too little on capital, risk and liquidity. This led to a regrettable tendency to promote products that delivered short-term income, rather than those that generated more sustainable benefits over time. RBSG has been clear in previous submissions to the Commission that the industry has to change, put its customers first and meet their expectations.
In our response we have divided the questions in the Commission’s call for evidence into broad categories that mirror the information request. We have also outlined some of the continuing challenges facing the industry and consumers in relation to PPI complaints, including those relating to the activities of Claims Management Companies (“CMCs”).
Summary
PPI is an example of a product being designed to meet an identified customer need, but being sold in a manner which did not always reflect customer interests.
RBSG historically offered its customers two forms of PPI—Single Premium PPI and Regular Premium PPI—under a number of brands. The majority of sales were made by businesses within the UK Retail division.
PPI was not compulsory and a customer’s decision whether or not to purchase it would, under RBSG policies and procedures, not have been directly taken into account in credit scoring or lending decisions.
RBSG’s sales were non-advised, and processes and training materials were designed to comply with prevailing regulatory requirements and to ensure that each customer was provided with sufficient information about the product to make an informed decision whether to purchase it.
During the full period in which they were on sale, PPI products were subject to RBSG’s internal product governance processes.
In large part due to the lessons learnt from PPI, there has been a significant cultural shift in RBSG’s approach to incentives for frontline employees. Incentives for RBSG’s senior executives were never directly linked to individual product sales.
In 2007, RBSG established a PPI Executive Steering Group to give a specific focus to the emerging issues and it oversaw a wholesale revision of sales processes to address regulators’ and customers’ concerns.
Whilst we accept that our sales processes were not always correctly followed, resulting in instances of mis-selling, we do not agree with the FSA’s assertion in its submission to the Commission that banks were unreasonable in their response or bluntly resistant to change. RBSG initiated numerous changes to PPI sales processes and literature as a direct result of the FSA’s interventions and regulatory amendments, with many of these changes being discussed with the FSA at the time.
RBSG is confident that the measures it has taken are the right ones to enable it to respond appropriately to the challenges posed to the industry by PPI mis-selling complaints.
We note the Commission’s request for a description of key events in relation to PPI, and we have included this in the relevant sections below. We are also aware that both the British Bankers Association (the “BBA”) and the FSA in their respective submissions included timelines of key events, and can confirm that we agree with the chronologies they have each submitted. However, if the Commission would like further detail please let us know.
A. High Level Chronology and Background
RBSG historically offered two forms of PPI to its customers—Single Premium PPI (most commonly sold with personal loans, with the total cost of the PPI policy being added as a lump sum to the capital borrowed) and Regular Premium PPI (most commonly sold with credit cards and mortgages, with the customer paying a premium each month for the PPI policy). We believe that the PPI products offered by RBSG were substantially similar in nature and scope to those offered by other banks and PPI providers over the period.
These products were offered under a number of different RBSG brands, including RBS, NatWest, Ulster Bank and Lombard, and were sold through three channels: in-branch, telephony and internet, dependant on brand. The vast majority of sales were made by businesses within RBSG’s UK Retail division (including NatWest and RBS), the structure and management of which have changed a number of times between 2000 and 2012.
From our records, we believe that RBSG companies began to sell PPI policies in the early 1980s. Prior to the acquisition of NatWest by RBS in 1999, both banks placed PPI business with various external insurers. From 2000 until 2004, a process was undertaken to place all new business with an internal RBSG underwriter—UK Insurance Limited. The underwriting of many existing policies was also transferred to UK Insurance Limited at around the same time.
PPI was generally offered to consumers as an ancillary product in conjunction with credit products such as loans, overdrafts, mortgages and credit cards. PPI was designed to provide financial protection together with peace of mind to customers who might have been unable to maintain loan or other debt repayments in the event of accident, sickness or redundancy. It also often incorporated life insurance which would clear the outstanding balance on the customer’s loan/overdraft/credit card in the event of the customer’s death. PPI was not compulsory and a customer’s decision whether or not to purchase it would, under RBSG policies and procedures, not have been directly taken into account in credit scoring or lending decisions. However, we acknowledge that there were some mis-sales where customers were (incorrectly) told that the PPI was either compulsory or would enhance their chances of credit approval.
RBSG ceased all sales of Single Premium PPI on 13 December 2008, in advance of the Competition Commission banning the product and the FSA asking firms voluntarily to cease the selling of Single Premium products. We ceased all sales of Regular Premium PPI, including Mortgage PPI, by 19 September 2011. We include in Appendix 1 a table summarising the volumes of Single Premium and Regular Premium policies sold by RBSG companies since 2000.
B. Sales Processes, Training and Incentives
Sales processes & training
Under RBSG’s processes, all sales of PPI were to be made on a “non-advised” basis and were designed to ensure that each customer was provided with sufficient information about the product—in writing, verbally or both—to be able to make an informed decision about whether or not to purchase it.
The sales processes and related staff training materials for each PPI product were tailored to the brand and channel involved and changed on numerous occasions to reflect the regulatory standards of the time. Initially, these were the relatively high level guidance set out by the Association of British Insurers (pre-2001) and the General Insurance Standards Council (2001–2005), which were replaced by the more detailed requirements contained in the FSA’s ICOB and ICOBS guidelines in 2005 and 2007 respectively. These standards applied to the sale of both single premium PPI (the product sold with loans until its withdrawal at the end of 2008) and regular premium PPI (the product most commonly sold with credit cards and mortgages).
During the whole period in which they were on sale, PPI products and sales were subject to RBSG’s internal governance processes. As a general rule, amendments to any product or sales process required approval through the product, distribution, risk and legal management structure within the relevant Retail businesses. Product and sales process owners, and related compliance teams, were also responsible for monitoring of and responding to internal and external stakeholder feedback or concerns, including any observations or interventions from regulators.
In accordance with these internal governance procedures, RBSG’s sales processes and related staff training programmes for PPI products were reviewed and enhanced as the applicable regulatory regimes evolved. They were also reviewed and enhanced in response to the FSA’s three thematic reviews (where remedial actions were discussed bilaterally with the FSA).
Notwithstanding the steps taken by RBSG to develop its sales processes, it later became apparent during discussions from late 2008 onwards that the FSA, the FOS and the industry were not in agreement about the precise standards against which past PPI sales should be measured when considering customer complaints. In particular, the industry had concerns over whether new regulatory standards were being applied retrospectively. These issues were at the heart of the British Bankers Association’s (“BBA’s”) application to the High Court for judicial review of the FSA and the FOS approach to PPI complaints handlings in 2010
The judicial review outcome provided clarity for the industry on the legal basis for the stances that the FSA and FOS had adopted on PPI complaint handling. In light of that outcome, we now accept that the levels of information given to customers by RBSG at the point of sale frequently failed to meet the standards subsequently confirmed by the FSA and the FOS (as clarified through the judicial review proceedings) to enable them to make informed purchase decisions, notwithstanding the steps taken by RBSG to comply with what it believed to be the regulator standards applicable during the period and discussions with the FSA during the same period. Applying these standards, a material number of PPI policies were mis-sold to customers. This recognition is at the heart of RBSG’s commitment to offer appropriate redress to those customers who have been mis-sold PPI products.
Incentives
In large part due to PPI, there has been a significant cultural shift in RBSG’s approach to incentives. Historically, RBSG operated an incentive scheme for frontline Retail staff that combined a service incentive with an incentive based on the sale of individual products, including PPI. RBSG has, since January 2012, begun an ongoing process to restructure its frontline incentive scheme so that the majority of branch staff are rewarded for service, compliance and overall branch contribution and not individual product sales. The only exceptions to this are some bespoke arrangements for specialist mortgage and investment advisors (who are subject to a more onerous compliance and monitoring regime). Incentive arrangements are kept under constant review to ensure that staff behaviours are aligned to meeting customer needs and treating customers fairly.
Incentives for RBSG’s senior executives were never directly linked to individual product sales; but rather involved the making of discretionary awards following an assessment of numerous objectives (both financial and non-financial) and were intended to reflect the overall performance of the businesses they managed.
C. The Emergence of Concerns Over Mis-Selling of PPI
PPI was typically sold by frontline branch and telephony staff (although internet sales were also made) and the checks and controls in place to monitor those sales and identify risks and concerns gradually evolved (for all products, including PPI) into RBSG’s current “three lines of defence” model. Frontline PPI sales were from 2004 subject to randomised quality assurance reviews, including mystery shopping, and sales processes and staff training were refreshed periodically to incorporate lessons from this. These “first line” measures were supplemented by compliance reviews (2nd line of defence) and internal audits (3rd line of defence).
As part of this, RBSG was, from 2005 onwards, under “close and continuous” supervision by the FSA involving regular discussion of products, processes and potential risk areas. These included specific discussions in relation to PPI and, in particular, changes to RBSG’s sales processes in light of the work summarised above.
In response to the increasing complaint volumes in H2 2007 RBSG established a PPI Executive Steering Group to give a specific focus to the emerging issues. This body oversaw a wholesale revision of sales processes which was intended to address regulators’ and customers’ concerns and the expansion and improvement of RBSG’s PPI complaint handling processes. In addition, it oversaw the establishment of a specialised, central PPI complaints unit in March 2008 to ensure that complaints were managed consistently and efficiently. This unit has, since that date, overseen the handling of all PPI complaints against Group companies and is also responsible for ensuring that emerging FSA guidance and lessons from the FOS process are incorporated into complaint handling policies.
In the period up to H1 2007 PPI-related complaint volumes were relatively low and did not give rise to concern of a systemic mis-selling issue. In addition, FOS uphold rates for PPI complaints were relatively low across the industry (c.20% to 30%) during this period. There was no emerging theme of “mis-selling” and complaints primarily related to decisions to decline claims or limit coverage. It was in H2 2007 that a noticeable increase in the volumes of complaints alleging mis-selling first began, particularly in relation to Single Premium PPI. It was also at this time that the first bulk/template-style groups of complaints began to be submitted by a small number of law firms and CMCs—a trend which escalated significantly and accounted for the majority of PPI complaints prior to the Judicial Review (and still accounts for many of the complaints that RBSG receives now).
The majority of PPI complaints received during H2 2007 focused on the process by which the product had been sold to customers. In particular, it was alleged that RBSG staff had (in breach of our processes at the time) applied pressure-selling techniques and/or had failed to disclose key limitations or exclusions. Many of these complaints included generic or template wording alleging the above as a matter of course. In many cases, however, the documentary evidence held on RBSG’s sales files did not appear to support the customer’s assertions.
Complaints volumes continued to rise into Q1 2008 and have increased steadily since that time to their present day levels. In tandem, media coverage of PPI and expressions of concern by regulators and consumer action groups steadily escalated over the period.
RBSG has kept its external auditors fully informed of developments on PPI complaint volumes and regulatory interventions throughout the period and has held regular and detailed discussions with them to ensure that appropriate accounting provisions have been made for anticipated redress payments. We also continue to engage with the FSA, the FOS, the BBA, leading consumer groups and the wider industry on the ongoing handling of PPI complaints.
D. RBS’s Engagement with Regulators on PPI Issues Between 2005 and 2008
It was only in 2008, following a formal request from the FOS that the FSA initiate a “wider implications” review, that the industry became aware of the FSA’s view that PPI mis-selling was “systemic”. It was also only during H1 2008 that FOS complaint uphold rates (for RBSG specifically and the wider industry as a whole) dramatically increased—from c.20% to 30% to c.80% across the industry..
There was previous, extensive engagement between the FSA and banks during November 2005, October 2006 and September 2007 on the FSA’s thematic reviews into PPI. This included many bilateral discussions between the FSA and RBSG in which the remedial actions RBSG planned to take in light of the FSA’s findings were discussed, and RBSG implemented a number of remedial measures designed to meet the FSA’s concerns. At no time prior to 2008 did the FSA advise RBSG that it considered that the remedial measures we proposed to take were inadequate. Nor did it advise the wider industry that a wide scale customer redress exercise was needed. RBSG believed in good faith that its implementation of the remedial actions at each stage over this time period were sufficient to ensure that the product was being sold in compliance with all relevant laws and regulations and that its remedial actions had met FSA concerns.
We do not agree with the FSA’s assertion in its submission to the Commission that banks were unreasonable in their response or bluntly resistant to change during this period up to 2008. Indeed, RBSG initiated numerous changes to PPI sales processes and literature as a direct result of the FSA’s findings (including in response to its new, more detailed, ICOBS requirements which took effect from Jan 2008).
Additionally, the FSA did not use the other formal means it had available at that time (including enforcement action, variation of permissions and other powers) which it could have relied upon to force further changes on the industry if it had been dissatisfied with the remedial measures being taken by banks at that time.
E. RBS’s Engagement with Regulators on PPI Issues from 2008 Onwards
From 2008 to 2010, senior RBS representatives participated in a series of regular PPI-related meetings and working group initiatives with representatives from the BBA, other banks, the FSA, the FOS and consumer group representatives to try to address the issues arising from increasing complaint volumes. The FSA’s and FOS’s specific concerns over complaint volumes, rising FOS uphold rates and what appeared to be emerging as “common failings” in historic sales were discussed in detail at these meetings.
There was much common ground, including the need to ensure that customers who had genuinely been mis-sold PPI received appropriate redress and that complaints were being handled fairly and consistently across the industry. As the BBA has outlined in its own submission, however, it ultimately became clear that a key and irreconcilable difference between the industry and the FSA was what the industry believed was the retrospective application to historic PPI sales of new standards (none of which was cited by the FSA during the discussions over the thematic reviews or its introduction of ICOBS from Jan 2008), particularly in relation to the information that had to be disclosed during a sale and whether it needed to be disclosed orally or in writing (with the industry feeling that the FSA was imposing oral disclosure requirements retrospectively).
Numerous possible solutions were proposed by the industry in the course of these discussions. Unfortunately, no agreement could ultimately be reached and the BBA began judicial review proceedings in relation to the FSA’s Policy Statement 10/12 and the FOS’s PPI complaint handling guidance. That application was rejected by the High Court in April 2011. The BBA did not appeal the High Court’s decision.
RBSG disagrees with the FSA’s statement in its submission to the Commission that banks resisted changes requested by the FSA because they were “more interested in the major revenue stream PPI offered”. As described above, the industry initiated the Judicial Review due to the important principle around retrospective regulation. The FSA’s comments do not fairly reflect the changes RBSG made to its PPI sales processes to respond to FSA concerns, including voluntarily removing single premium PPI products from sale in advance of the industry-wide ban.
Following the BBA’s decision not to appeal the High Court judgment, RBSG then fully incorporated Policy Statement 10/12 into its PPI complaint handling processes. This included undertaking Root Cause Analysis (RCA) of specific categories of past PPI sales and conducting Past Business Reviews of any categories of customers identified during the RCA as having potentially suffered detriment. This process is ongoing today and RBSG remains in very regular discussion with the FSA on all aspects of PPI complaint handling.
F. RBS’s PPI Clawback Review
During 2011, RBSG conducted a focused review to determine whether it would be appropriate to apply clawback in respect of PPI to executive performance awards for 2008 (ie those awarded in Q1 2009 in relation to the previous year’s performance). This review was initiated by the RBSG CEO and was overseen by RBSG’s Remuneration and Board Risk Committees, both of which are chaired by non-executive directors. (2008 was chosen as the focus of this review for two reasons: (i) only unvested bonuses are eligible for clawback and, by 2011, bonuses awarded for years prior to 2008 had already vested in full and (ii) RBSG ceased selling Single Premium PPI, the most heavily criticised product, on 13 December 2008.)
The review concluded that divisional and RBSG senior management had taken reasonable and appropriate action during 2008 in relation to withdrawing PPI from sale and to improving complaints handling processes. In addition, the two most senior people responsible for the Retail business during that period had not received a bonus for the 2008 performance year and had since left RBSG’s employment. Furthermore, the review noted that PPI sales represented only 3–4% of RBSG’s Retail division’s total income in 2008. Accordingly, the review concluded that no clawback should be exercised. The FSA was notified of this outcome in January 2012.
More generally, however, it is important to note that the negative impact of PPI redress payments on RBSG’s financial results since 2008 has been significant. Indirectly, therefore, it can be said that PPI has reinforced for all management and staff the critical importance of ensuring that financial products are always sold in a compliant, appropriate and sustainable way. Clearly, the high profile (and negative) coverage of PPI has reinforced this message.
We have also taken a range of measures aimed at making RBSG more customer-focused and to improve management. We believe that the delivery of real cultural change is key to creating a good company that serves its customers well, and the actions we are taking on incentives are an important component to this change.
G. Root Cause Analysis, Past Business Reviews and Lessons Learned
Following the judicial review decision, RBSG conducted an extensive Root Cause Analysis of PPI complaints and certain historic PPI sales. The output of this analysis informed PPI complaint handling procedures and, based on its findings, we launched (in September 2012) a proactive contact programme for certain categories of customers. The progress of this programme, including customer response rates, is regularly discussed with the FSA. RBSG also maintains regular contact with FOS, as part of which it closely monitors the volumes of PPI complaints being referred for adjudication and the resulting outcomes.
Following the withdrawal of both Single and Regular Premium PPI products from sale, RBSG recognised that there remained a customer need for a product to protect against the potentially adverse impact of illness or redundancy on income—particularly in the current economic environment. On 19 October 2011, UK Retail launched a new Income Protector Product, the sale of which is strictly separate from the sale of any credit product to the customer. This segregated sales process reflects several of the lessons learned from PPI—including that customers require adequate time after purchasing a credit product to consider whether they also require such insurance and that the product should be clearly identifiable as optional—and was one of the key remedies imposed by the Competition Commission.
The new product and the sales process for it were designed following extensive discussions with the regulator and consumer groups to help ensure the lessons learnt from PPI were properly incorporated. In addition, the actions taken to monitor the sales of the new Income Protector Product are included within the Compliance Reports which, since May 2011, have been submitted by RBSG to the OFT for external scrutiny, in accordance with the Payment Protection Market Investigation Order 2011. The OFT has not challenged any aspect of RBSG’s submissions.
H. Cross-Selling of Retail Banking Products
Meeting the financial needs of our customers requires RBSG to cross-sell a range of products and services. We also offer, in our range of packaged current accounts, “bundled” products including travel insurance, breakdown cover and discounted lending rates.
Any consideration of cross-selling issues inevitably involves a recognition that, across the industry, the current UK retail banking model remains predicated on a degree of cross-subsidisation (including the “free banking if in credit” principle). For example, in the case of Single Premium PPI products, the sale of such products coincided with the availability of historically low personal loan rates for customers, reflecting the combined profitability of the credit and insurance products. Indeed, for much of the period in question, personal loan rates were so low that they did not (alone) cover the cost of credit for the customer. In other words, the low personal loan rates for all customers at that time would not have been possible without the cross-subsidisation from PPI sales to some customers.
Whether banks should shift away from cross-subsidisation—and the fundamental changes in pricing and charging practices that might follow such a move—is already the subject of vigorous debate with a broad range of stakeholders, including RBSG. A principle driver of the debate should be ensuring that customers are treated fairly and that their financial needs are met. This issue is of paramount importance and should be viewed in a broader context rather than isolated against the backdrop of PPI mis-selling.
I. Continuing Challenges for the Industry and Consumers
RBSG is confident that the measures it has taken are enabling it to respond appropriately to the challenges posed to the industry by PPI mis-selling complaints. However, we have a number of continuing concerns. These are:
1. The total cost to the industry of PPI redress claims has spiralled far beyond initial FSA estimates of c.£58—£80 million a year1 to many billions. Furthermore, the FSA cites a figure for total premiums collected across the industry of £44 billion (excluding both interest on these premiums and the 8% interest that gets added to any redress paid), so clearly there is a real risk that the costs to the industry to increase further.
2. A high proportion of complaints relate to very historic PPI sales (pre-2005), and are submitted with minimal or no supporting evidence. Given the passage of time, bank records of the sale are also likely to have been destroyed in accordance with standard document retention policies. As a result, it is almost impossible for banks to investigate fully the circumstances of the sale and establish whether the customer’s complaint is valid. This exposes the industry to a serious risk of abuse by claimants or CMCs who may be encouraged to submit false claims about historic sales in the knowledge that minimal verification of the complaint can be conducted.
3. While neither RBSG nor the wider banking industry disputes the right of a customer to instruct a third party such as a solicitor or CMC to pursue a claim on his behalf, we regard the dramatic growth of the CMC market as, overall, an adverse development for consumers and for banks alike. These points do not detract from the lessons that the industry has learned from PPI but we believe the concerns outlined below merit further consideration as to whether additional protection from CMCs should be introduced for consumers. The key concerns RBSG has in relation to CMCs are:
Marketing tactics employed by some CMCs, engaging in mass emailing/texting/telephoning of the public with no regard to whether the individual actually ever had PPI or not is causing a public nuisance and they frequently appear to breach marketing regulations.
These tactics are also creating misleading customer expectations, with such messages often claiming the customer is owed thousands of pounds in compensation (even where the customer never actually had PPI).
Up to 50% of customers who complain about PPI do so through CMCs. despite simple, tailored procedures through which customers can file PPI complaints and repeated public statements that customers should complain to their banks direct rather than pay a CMC up to 30% of their redress. As a result, they are unnecessarily losing a large portion of their redress to third parties.
RBSG and the wider industry have repeatedly highlighted concerns over the high volume of PPI complaints submitted by CMCs where it ultimately transpires that no PPI was ever held by the customer, with complaints from some CMCs being up to 60% “no PPI” in outcome.
Such spurious complaints increase operational costs for the industry (which exacerbates the adverse capital implications described above) and hampers the ability of firms to deal with genuine customer complaints.
Many CMCs routinely submit complaints in template form meaning that RBSG has to revert to customers for further clarification before their complaints can be assessed. As a result, not only are such customers foregoing a significant portion of any redress that they may be due but they also receive no perceptible benefit from using a CMC, and, indeed, that CMC’s involvement often slows down the handling of the complaint.
We hope that the information in this response and in the attached Appendices will be of assistance to the Commission and we are happy to try to provide any additional details that may be requested.
Supporting Appendices:
1 Data on PPI sales volumes by RBSG companies since 2000; and
2 Current Group and UK Retail governance structures.
2 January 2013
1 See Annex 1 to the FSA’s Consultation Paper 09/23 (The assessment and redress of payment protection insurance complaints).