Parliamentary Commission on Banking StandardsWritten evidence submitted by Virgin Money

Virgin Money has never directly manufactured or sold PPI products to our customers, and neither has Northern Rock plc from its inception on 1 January 2010, or after we acquired the business on 1 January 2012.

Church House Trust (CHT), a Virgin Money subsidiary, did sell a small amount of Mortgage Payment Protection Insurance (MPPI) in the past, but ceased to make sales in 2007.

Virgin Credit Cards are issued under a partnership agreement by MBNA and PPI cover was offered and sold by MBNA to our cardholders as part of that arrangement. Virgin Money agreed MBNA could offer cardholders PPI provided this was done in compliance with all relevant laws and regulations.

Virgin Money welcomes the opportunity to contribute to the Parliamentary Commission on Banking Standards request for information on Payment Protection Insurance (PPI). In this memorandum we have set out Virgin Money’s response to the Parliamentary Commission’s questions.

Our response covers the points raised in the letter from Andrew Tyrie, Chairman of the Parliamentary Commission on Banking Standards, to Jayne-Anne Gadhia, CEO of Virgin Money received on 30 November 2012.

A. Chronology

1. A summary of the history of PPI sales at your bank from origination of the idea to now (including a tabular chronology of key events). Please specify key decisions that were made by; product development or product approval committees, risk or compliance committees, internal audit committees, complaints committees, Senior Executive committees, Board committees and the main Board. Please also specify the date of these meetings and the chair of the meeting

Virgin Money has never directly manufactured or sold PPI products to customers, and neither has Northern Rock plc from its inception on 1 January 2010, or after Virgin Money acquired the business on 1 January 2012.

Church House Trust (CHT), a Virgin Money subsidiary, did sell a small amount of Mortgage Payment Protection Insurance (MPPI) in the past, but ceased to make sales in 2007.

Virgin Credit Cards are issued under a partnership agreement by MBNA and PPI cover was offered and sold by MBNA to our cardholders as part of that arrangement. From January 2002–July 2008 the PPI offered by MBNA was Virgin branded. In July 2008 however, the sale of Virgin Money-branded PPI products was withdrawn.

The decision to withdraw Virgin Money-branded PPI products was made by Virgin Money Chief Executive Officer (CEO), Jayne-Anne Gadhia, in a Virgin Money/MBNA Management Steering Meeting held on 19 December 2007, shortly after her return to the Virgin business.

2. An organogram outlining how the above referenced committees link to each other and link to the Board

Not applicable.

3. A summary of how your bank sourced the PPI product(s) it sold (for example, were they manufactured in-house, through a joint venture or via a third party?) and describe how this may have changed over time

Virgin Money has never sold PPI directly to its cardholders. Virgin Credit Cards are issued under a partnership agreement by MBNA and PPI cover was offered and sold by MBNA to our cardholders as part of that arrangement.

4. Please summarise the training that was in place for all staff selling PPI and through a tabulated chronology, how this may have changed over time

Virgin Money has never sold PPI directly to its cardholders. As a result, Virgin Money has not held training in relation to PPI sales practices.

5. Please summarise any incentive schemes that were in place for all staff selling PPI and through a tabulated chronology, if appropriate, how this may have changed over time. Please explain to what extent Executive Director and Senior Executive incentive schemes were impacted by PPI sales and how this may have changed over time

Virgin Money has never sold PPI directly to its cardholders. As a result, Virgin Money has never had incentives in relation to PPI sales.

6. With regard to the finances of the PPI product, please describe income, costs (including claims) and thus product profits. Please use a tabulated chronology, if appropriate, to show how this may have changed over time

Virgin Credit Cards are issued under a partnership agreement by MBNA and PPI cover was offered and sold by MBNA to our cardholders as part of that arrangement.

Through overall card net revenue sharing with MBNA, Virgin Money has effectively shared in credit card related PPI net revenues as outlined in the table below:

Date

Derived Virgin Money PPI
Related Income

2007 (Aug–Dec)

£1.4m

2008

£3.8m

2009

£2.5m

2010

£7.7m*

2011

£5.7m

2012 (Jan–Nov)

£4.3m**

* Virgin Money’s share of the overall card net revenues increased threefold in 2010 and PPI income increased correspondingly

** Estimate Jan-Nov 2012

7. How far was development of this product originally influenced by wider public policy objectives? Where a public policy objective did exert influence what did your bank perceive that objective to be?

Virgin Money had not developed the product and was not therefore influenced by public policy. The withdrawal of the Virgin Money brand from the MBNA sold product was a compromise after a discussion with MBNA on ceasing PPI sales altogether, which MBNA were not willing to do. Virgin Money agreed to continued sales on the basis of them being fully compliant with the relevant regulations.

8. What were the perceived consumer benefits of PPI and who were the perceived beneficiaries?

PPI was an insurance product designed to cover repayments in the event that a purchaser’s loss of income resulted in them being unable to service their debt. And, although Virgin Money has never sold PPI directly to its cardholders we recognise the perceived benefit as being consumer protection against adverse financial circumstances and their consequent peace of mind.

B. Mis-selling

9. What information sources or controls were in place to monitor whether PPI was being sold appropriately? How, if at all, did this change over the period 2000 to 2012, and did these processes identify that PPI was being mis-sold?

Virgin Money has never sold PPI directly to its cardholders and therefore has relied upon MBNA processes and governance in this regard.

10. At any stage did the bank decide to review PPI mis-selling? If so please describe the nature of reviews, ie how reviews were conducted, by whom, what conclusions were reached and what changes were made. With regard to any changes to the way PPI was sold please identify the decision making body and its chair

Virgin Money has never sold PPI directly to its cardholders and therefore has relied upon MBNA processes and governance in this regard.

11. Which actions were taken in response to external reports of mis-selling by such as WHICH?, the FSA and FOS?

Virgin Money has never sold PPI directly to its cardholders and therefore has relied upon MBNA processes and governance in this regard.

12. Details of when the bank became aware that PPI was being mis-sold, including details of any involvement of the Board and the control functions within the bank in discovering mis-selling

Virgin Money has never sold PPI directly to its cardholders and therefore has had no mis-selling.

13. A timeline of the action the bank took, both externally and internally, when it discovered that it was mis-selling PPI

Virgin Money has never sold PPI directly to its cardholders and therefore has had no mis-selling.

14. What sanctions, including clawback of remuneration, have you placed on any staff who were involved in mis-selling of PPI? Please indicate the level within the organisation at which these staff were working. Please also indicate whether or not the bank continues to employ them and, if not, whether they are working in an FSA controlled function at another regulated firm (according to the FSA’s register of Approved Persons)

Virgin Money has never sold PPI directly to its cardholders and therefore has had no mis-selling or consequent sanctions.

15. What discussions did the bank have with its External Auditors about PPI mis-selling and on what dates?

Virgin Money has never sold PPI directly to its cardholders and therefore has had no mis-selling.

16. Why, in your opinion, did the market itself fail to “correct” the mis-selling of PPI?

In our opinion, the market failed to correct itself as the result of the high profitability of PPI, which was difficult for the larger institutions to walk away from, even if they were aware of any improper sales process. The industry at large knew PPI was a problem but nobody was prepared to be the first to stop the sale of PPI because they felt profitability would be eroded and/or it would be detrimental to their share price.

C. Regulatory Intervention

17. At what stages during the period your bank sold PPI did regulatory intervention cause the product to be reviewed? What was the substance of these reviews and what changes were implemented as a consequence of these reviews? With regard to the FSA report on PPI in 2005, what action was taken at all levels of the bank from the Board downwards?

Virgin Money has never sold PPI directly to its cardholders and as such had no regulatory intervention impacts.

18. To what extent did regulatory interventions alter the way PPI was sold by your bank? Please summarise where any of these interventions may have given rise to a view within your bank that sales processes were fit for purpose.

Virgin Money has never sold PPI directly to its cardholders and as such had no regulatory intervention impacts.

D. Recovery

19. What was your Board and Executive Committee’s assessment of the root causes of PPI mis-selling at your bank? Please provide minutes of any discussions about root causes that took place at Board and Executive Committee

Virgin Money has never sold PPI directly to its cardholders and as such we did not conduct a root cause assessment.

20. What has the bank done to address the root causes of PPI mis-selling? What has been done to prevent mis-selling happening in the future?

Virgin Money has never sold PPI directly to its cardholders and therefore had no actions to address root causes.

21. PPI is a product that was cross-sold alongside another product. Please provide details of retail products you currently commonly cross-sell

Virgin Credit Cards are issued under a partnership agreement by MBNA and PPI cover was offered by MBNA to our cardholders as part of that arrangement. PPI could not be cross sold to any of other Virgin Money products; it was linked to the credit card only.

Active cross-selling is not a significant part of the Virgin Money business strategy and is only used as a technique where we are comfortable that there are clear potential benefits to customers—for example, insurance provision at the point of house purchase.

22. Please explain the advantages of cross-selling and risks arising from cross-selling from both the bank’s standpoint and the customer’s. Describe how you mitigate against any risks arising from cross-selling

Virgin Money is not currently engaged in active cross-selling of its products. That said, Virgin Money is aware of the advantages (and risks) to customers and banks from cross-selling. For example, if a current account customer has an established track record with a bank it should be much easier for the bank to confidently underwrite that customer for lending, and indeed where pricing for risk is available, potentially offer a better price than would be the case for a new applicant. So for both parties, ease of process and optimisation of pricing can apply. Virgin Money is not yet in a place to execute on this kind of approach, but we would, for example, use our knowledge of a customer (such as demographic factors) to target our product offerings.

Virgin Money does not object to cross selling in principle, provided mitigants are in place for the risks entailed, including:

Simple, fair and transparent products and pricing.

Appropriate controls on use of customer data.

Clear identification and confirmation of customer need.

A break in the sales process and referral to advice for customers with more complex needs.

Incentivising on quality measures for sales staff (not quantity).

Suitably trained and monitored sales staff.

23. Please provide details of products you currently commonly bundle together and whether or not you explicitly charge for that bundle

Virgin Money does not currently engage in the active bundling of products.

Virgin Money recognises the risks in relation to product bundling are often similar to cross-selling but the key risks come down to product complexity, pricing, appropriateness and eligibility. To mitigate these risks, as previously noted, we believe in simple and clear products.

24. Please explain the advantages of bundling and risks arising from bundling from both the bank’s standpoint and the customer’s. Describe how you mitigate against any risks arising from bundling

Please see response to question 23.

25. Please specify whether you have replaced PPI with another product or products. If you no longer sell PPI type products please confirm how you help customers insure against the risks of accident and/or sickness and/or unemployment PPI was originally designed cover

Virgin Money does not offer any products designed to replace PPI. The protection products we offer our customers are limited to payments in the circumstances of ill-health, eg via critical illness insurance cover, or referral to our investment and life insurance partner to consider traditional long term income protection policies.

26. If you have replaced PPI, please specify what replacement products you have put in place, how they work and all key decisions in relation to them that were made by senior level product development or product approval committees, senior level

Please see response to question 25.

31 December 2012

Prepared 24th June 2013