Parliamentary Commission on Banking StandardsWritten evidence from Clive Briault

I have responded to the best of my recollection in preparing the answers below, which address the specific questions put to me by the Commission.

My Role and Responsibilities in Relation to PPI

I was the Managing Director, Retail Markets, and a member of the Board, the Executive Committee and the Regulatory Policy Committee of the Financial Services Authority (FSA) from June 2004 to April 2008. I reported to the Chief Executive and to the Board of the FSA. The organogram on page 2 reflects the FSA’s organisational structure in 2006–2007.

I was also a member of the Committee of European Banking Supervisors (CEBS) during 2004–2006, and chaired the main CEBS sub-committee on the implementation of the EU Capital Requirements Directive.

Prior to June 2004 I had been:

Bank of England 1980–1998

FSA Director of Central Policy Division—1998–2001

FSA Director of Prudential Standards Division—2001–2004.

The Retail Markets Managing Directorate of the FSA had approximately 800 staff (out of around 2,000 for the FSA as a whole) and a budget of approximately £80 million during this period. The responsibilities of the Directorate included:

1.The supervision of all regulated firms whose business was predominantly with retail customers. This represented approximately 16,000 firms, ranging across the major UK banks (Barclays, HSBC, Lloyds, RBS, Santander and HBOS); smaller retail banks and building societies; life insurers (including Aviva, Legal and General and Prudential); general insurers with retail business (home, motor, health, travel); retail facing asset management and other investment firms (including Fidelity and Invesco); and investment, mortgage (from late 2004) and insurance (from early 2005) advisers and brokers.

2.The conduct of business policy division (which was responsible, for example, for the new rulebooks for general insurance and mortgage brokers).

3.The FSA’s oversight of the financial markets in which retail consumers operated, including thematic reviews, mystery shopping and consumer research.

4.The FSA’s Treating Customers Fairly, Retail Distribution Review and Financial Capability initiatives.

5.The liaison between the FSA and other bodies such as the Financial Ombudsman Service, the Financial Services Compensation Scheme, the Office of Fair Trading, consumer organisations and relevant trade bodies.

Until mid-2004 I had no direct responsibilities for PPI, but the development of the Insurance Conduct of Business (ICOB) rules and guidance manual was discussed at the FSA’s policy committee (later the Regulatory Policy Committee), of which I was a member.

When I became the Managing Director, Retail Markets, my Directorate was responsible for most aspects of the FSA’s work relating to PPI, including conduct of business policy and the Treating Customers Fairly initiative; the thematic reviews, mystery shopping and consumer research undertaken into the selling of PPI; liaison with the OFT and the Competition Commission; and the supervision of firms selling PPI.

However, a separate Enforcement Division, reporting directly to the FSA’s Chief Executive, was responsible for undertaking investigations that might lead to enforcement actions and for taking decisions on whether to proceed with enforcement actions.

Chronology

What view the FSA had formed of the sales of PPI:

between HMT announcing the FSA would regulate insurance selling on 1/1/2001 and the FSA publishing final ICOB rules in June 2003

Before January 2005 the sale of general insurance products was subject to self-regulation through the General Insurance Standards Council. Some consumer organisations had expressed concerns regarding the sale of PPI during this period, as had the Treasury Select Committee in a report on credit cards. This is why PPI was one area of focus in the series of thematic reviews undertaken by the FSA after it had taken responsibility for the regulation of general insurance in January 2005.

between the FSA publishing final ICOB rules in June 2003 and publishing the first FSA thematic report in November 2005

Having taken responsibility for regulating and supervising the sale of mortgages and general insurance in late 2004/early 2005 respectively, the FSA announced in its Business Plan for 200506 (published in January 2005) that it would undertake a series of thematic reviews in the mortgage and general insurance sectors (including one on the linked sales of PPI) to assess whether firms were complying with the FSA’s new rules, and to improve firms’ practices for future sales where selling practices were non-compliant. These reviews would also contribute to the post-implementation reviews of ICOB and MCOB.

The FSA’s first thematic report on the selling of PPI (published in November 2005) was based on visits by FSA staff to 45 firms and mystery shopping commissioned from an external firm.

Standards of compliance with the new FSA rules were found to be relatively high among the 15 firms in the sample that specialised in regular premium PPI to cover payments on prime quality mortgages.

However, in the other 30 firms, which sold PPI with revolving credit (credit and store cards and catalogues), loans (secured and unsecured loans) and sub-prime mortgages, the FSA found that:

There was a risk of inappropriate sales: around half of these firms failed to take reasonable steps to ensure that customers did not buy policies on which they could not claim or which provided only very limited cover;

There were inadequate controls in place for non-advised sales: about half of the firms selling on a non-advised basis did not have adequate systems to stop their staff giving advice, or were providing information that amounted to giving advice;

Advice on PPI was often likely to be poor: most firms did not have systems in place to assess suitability adequately;

There was an over-reliance on product documentation given to the customer at the expense of explaining the policy to the customer orally: most firms selling by telephone did not give sufficient information on exclusions;

The quality and timeliness of product and price disclosure by some firms selling single premium policies was poor;

The level and structure of inducements and targets for sales staff could encourage mis-selling in some firms;

Training and competence of sales staff was not adequate in around half of firms; and

Compliance monitoring was variable and in some cases very poor.

When this thematic review was published, the FSA press release emphasised that when properly structured, explained and sold, payment protection insurance can provide worthwhile cover for consumers against unexpected changes in their personal circumstances. However, compliance standards, especially in single premium PPI business, were generally weak. Those firms where these problems exist must take urgent action to address them.

These findings posed a serious risk to consumers because of the poor disclosure of product and price details; the possibility that consumers may not be eligible to claim against their policies; and consumers may not be aware that they may receive little money back if they cancel these policies early.

The findings from this thematic review were actively pursued by the FSA. This included:

Communicating widely the results of the review through:

letters to the chief executives of all medium and large sized firms that sold or underwrote PPI;

a range of materials to increase awareness among small firms; and

including the results of the review in major speeches and in various TCF publications;

Requesting all firms selling PPI to assess themselves against the findings of the review and to make whatever improvements were necessary to ensure compliance with the ICOB rules and with the high-level Treating Customers Fairly (TCF) rule;

Referring five firms to the FSA’s Enforcement Division for further and more detailed investigation. This resulted in four enforcement actions towards the end of 2006;

Initiating a second thematic review, to be undertaken in 2006, to monitor progress;

Launching a series of meetings (which I chaired) with industry trade bodies to explore the possibilities for industry-led initiatives to improve the PPI market; and

Internal discussions of policy measures that the FSA could take to improve the PPI market (some of these possible measures, and the possibility of intervention by the Competition Commission, were mentioned in a speech I gave to the Chartered Insurance Institute Annual Conference in September 2005).

between the FSA publishing the first thematic report in November 2005 and publishing the second FSA thematic report in October 2006

The findings of the second thematic review were published in October 2006. This was based on visits to 40 firms. Some improvements were identified since the first thematic review, but three key areas of concern were highlighted:

Many firms were still not giving customers clear information during the sales conversation. It was not being made clear that PPI was optional and customers were not receiving full information about how much the insurance would cost.

Customers were still not being made fully aware that there may be parts of the policy under which they cannot claim. Furthermore, some firms were still failing to establish that the PPI policies they recommend were suitable because they were not collecting sufficient information from the customer—for example about existing cover.

Where customers were sold single premium policies, this was not always done with the best interests of the customer in mind—for example, where a choice between a regular or single premium was available, the sales conversation may be biased towards the single premium policy when the customer’s circumstances suggested this was not the most suitable option.

As with the findings of the first thematic review, these results were widely publicised, and the FSA followed up the review by:

imposing urgent remedial programmes on a number of firms to improve their sales standards;

continuing to pursue formal disciplinary action against firms who fall well below the required standards (the second thematic review led to seven enforcement actions); and

using firm-specific supervision and wider initiatives (such as TCF) to focus the minds of firms’ senior management on addressing the areas of concern and embedding the behaviours and standards expected.

Also during this period:

At the meetings with industry trade bodies in late 2005 and the first half of 2006 the trade bodies offered to make improvements in a number of areas, including the provision of guidance on improved sales procedures and training; improved consumer information; improved quality of after-sale disclosure, and refunds on single premium PPI when a loan is cancelled or repaid early. But these improvements would not make a significant difference to how the PPI market operated.

Second, the FSA was considering, as part of the existing wider review of the effectiveness of the regulatory regime for general insurance products, whether new rules are required in the area of PPI sales. A number of policy options were under consideration at this stage, ranging from amending ICOB to strengthen the rules in areas such as the information given to customers and suitability checking, to making structural changes to the PPI market such as by separating the sale of PPI from the underlying loan transaction.

In addition, the FSA considered whether it could prevent firms from selling single premium PPI, either by imposing restrictions on individual firms or by writing rules. However, at this stage the FSA had insufficient evidence to justify taking such steps.

Third, the OFT received a super-complaint from the National Association of Citizens Advice Bureaux in September 2005 on the selling of PPI and launched a market study in April 2006 to investigate this. The FSA liaised closely with the OFT in its work on the market study, recognising the more fundamental problems in the PPI market. The OFT published its market study in October 2006, and concluded that there were sufficient concerns within the PPI market to warrant a referral to the Competition Commission (this referral was made in February 2007). The OFT market study found:

low claims ratios compared to other insurance products

high commission rates in comparison with other general insurance products

wide differentials in price for the same level of cover

possible cross-subsidisation to keep Annual Percentage Rates low

consumers that do not shop around or switch, and

a lack of competitive pressure on prices.

between the FSA publishing the second FSA thematic report in October 2006 and publishing the third FSA thematic report in September 2007.

The main purpose of the third thematic review was to monitor whether firms were addressing the concerns highlighted in the first two thematic reviews. The review covered 150 firms, including mystery shopping of personal loan providers. The mystery shopping identified serious failures in the sales processes of a number of firms selling single-premium PPI alongside unsecured personal loans.

The review assessed whether firms had made improvements in five key areas. Welcome improvements were found in two of these: the vast majority of firms were making it clear to customers that PPI is optional; and firms were offering cancellation refunds on virtually all single premium PPI policies.

However, little or no progress had been made in three other areas. Firms were not:

giving customers clear information about the product and what it will cost;

informing customers of the extent to which they were eligible for PPI cover and what they were covered for; and

informing customers why, where advice was given, the recommended PPI policy met their demands and needs.

The press release on publication of the second thematic review in September 2007 emphasised that while some progress had been made by the industry, the FSA was extremely disappointed that some firms had still made little progress in improving their sales practices. The FSA re-stated that PPI can provide valuable protection for consumers, but they are entitled to expect that they will be treated fairly by firms when they buy it. They must be told how this product works, what it covers, and how much it costs. Too many firms were not meeting these requirements.

As a result of the review:

Some firms were referred to the FSA’S Enforcement Division for further investigation;

The FSA announced that it would strengthen its actions against firms who fail to treat customers fairly when selling PPI, including higher fines. Firms had been given due warning of their obligations to treat their customers fairly, both generally and on PPI in particular.

11 firms stopped selling PPI either permanently or temporarily until such time as they could improve their sales processes and/or retrain staff;

3 firms cancelled their FSA authorisation to sell PPI; and

4 large firms reviewed past PPI sales to ensure they were appropriate.

Also during this period, the FSA concluded its post-implementation review of ICOB. Provisional proposals for changes to ICOB were published in March 2007, a full consultation paper was issued in June 2007, and the final changes to ICOB were published in December 2007. These changes reflected three conclusions:

1.There should be greater differentiation between the detailed rules governing different types of general insurance. The rules for motor, household and travel insurance could be simplified and could rely to a greater extent on high-level rules.

2.Reflecting the findings of the thematic reviews, the rules for PPI needed to be strengthened in a number of areas, including status disclosure by firms selling PPI; obtaining information from customers to assess the suitability of PPI products for customers; improved disclosure of product information, including its price; and cancellation rules.

3.More radical amendments to ICOB to change market structure were also considered, for example to require a one-week gap between a loan agreement and the selling of PPI to protect loan repayments. But the FSA concluded that it would be unhelpful to pre-empt the outcome of the Competition Commission investigation (which might recommend a different set of remedies), and that the Competition Commission was better placed than the FSA to undertake a cost/benefit analysis of the complex competition issues in the PPI market. The FSA therefore made clear that further amendments to ICOB might be necessary to implement the Competition Commission’s recommendations.

What impact did the OFT’s and Competition Commission’s Market study have on FSA thinking when it was published in October 2006?

The OFT report demonstrated that the causes of the problems in the PPI market were complex and were rooted in competition concerns. It referred the market to the Competition Commission for further investigation and to allow the Competition Commission to develop its own recommendations.

As explained above, the FSA decided not to pre-empt the Competition Commission’s recommendations in its review of the ICOB rules.

Why in your opinion the ICOB rules published January 2004 were amended after a review started in September 2005 and re-published in December 2007

To what extent were the original rules effective in preventing PPI mis-selling and to what extent were they defective?

In what way did the thematic reviews inform the revision of the rules?

The FSA had announced in 2005 its intention to review the effectiveness of its regime for the regulation of general insurance. The original ICOB rules had been finalised well before they came into force in January 2005 and it was important to assess whether they were effective. This review was not limited to PPI. The results of this post-implementation review—including the results of the three thematic reviews on PPI—led to the changes in ICOB described above.

The detailed ICOB rules operated alongside the higher level rules contained in the FSA’s Principles for Business, including the rules that firms must act with integrity, conduct their business with due skill, care and diligence, and treat their customers fairly.

As described in the three thematic reviews, PPI mis-selling reflected three failures:

The failure of firms to comply with the detailed ICOB rules;

The failure of firms to treat their customers fairly; and

A structural market failure under which customers did not have either the ability or the willingness to exercise sufficient knowledge and understanding for them to represent a genuine competitive force in the PPI market.

So, even if the amended ICOB rules had been in place from January 2005 a significant amount of PPI mis-selling would probably still have occurred.

What was the rationale for the Mystery Shopping evidence gathering that started in February 2008?

Why was this needed given three previous thematic reviews?

The mystery shopping in 2008 was undertaken for three reasons:

First, as had been signalled in the third thematic report, to gather additional information with the intention of using the results in enforcement proceedings against firms where appropriate.

Second, during 2007 the FSA had begun to give increasing consideration to the potential losses that consumers might have suffered from the poor practices that had been identified in the selling of PPI, and to how these consumers could obtain redress. The mystery shopping was designed to help to identify the extent of consumer detriment.

Third, pending the outcome of the Competition Commission’s investigation, discussions continued on the use of more radical responses to PPI mis-selling, including the use of the FSA’s power to vary firms’ permissions to prevent them from selling particular PPI products, or from selling them through particular channels, until there was evidence of improved sales practices. The results of mystery shopping could be used to justify the use of such powers, or to persuade firms that they should take such action on a voluntary basis.

General

At what point was it clear to you that PPI was being comprehensively mis-sold?

As outlined above, each of the thematic reviews (in 2005, 2006 and 2007) identified serious failings in the selling of PPI. This led to the series of actions described above taken by the FSA and other authorities, including a large number of enforcement actions against individual firms. It also became increasingly evident that poor sales practices were leading to significant consumer detriment.

However, none of these reviews or other work indicated “comprehensive” mis-selling, if “comprehensive” is taken to mean that “all or nearly all” sales of PPI were mis-sold. Each review found a range of selling practices in the market, and examples of good practice (for example the selling of regular premium PPI with prime quality mortgages) and improving practice (as for example in the second and third reviews) were highlighted by the FSA.

In addition, a major high street bank was referred to the Enforcement Division for further investigation in late 2005 following the first thematic review, when a small sample of PPI sales by that bank indicated issues that would have been problematic if repeated more widely across PPI sales by that bank. The subsequent detailed and lengthy investigation by the FSA’s Enforcement Division concluded at the end of 2007 that there was insufficient evidence to bring any enforcement action against that bank. Again, this was not consistent with “comprehensive” mis-selling of PPI.

Why in your opinion were banks not stopped from selling PPI during the period January 2001 to April 2008?

The FSA did not regulate the sale of general insurance until January 2005. Between 2005 and April 2008 the FSA was:

(a)Building up a picture of the PPI market, including through three major thematic reviews, and actively communicating the findings back to the market;

(b)Encouraging firms to review, and where necessary to improve, their procedures for selling PPI, by publicising the results of its reviews and its enforcement actions against a large number of individual firms, and by following up the results of the thematic reviews with firms that sold PPI;

(c)Taking enforcement action against firms which had breached the ICOB rules and the Treating Customer Fairly rule;

(d)Discussing with the industry, consumer organisations, the OFT and the Competition Commission how the market for the sale of PPI could work more effectively to protect consumers;

(e)Awaiting the outcome of the Competition Commission investigation of the PPI market, which had begun in 2007;

(f)Amending the ICOB rules and guidance to introduce stricter requirements on the sale of PPI and other protection products; and

(g)Taking a nuanced view of the PPI market, with single premium PPI sold in conjunction with personal loans regarded as being the largest potential source of consumer detriment, while regular premium PPI sold to protect prime mortgage payments appeared to be operating reasonably well.

This approach was based on three premises:

(i)That PPI, if sold correctly, could offer valuable protection to consumers. It was not a fundamentally flawed product;

(ii)That the market for PPI could be made to work more effectively through industry- led improvements and through interventions by the FSA and other authorities; and

(iii)That mis-selling should be punished through increasingly severe enforcement actions.

The seriousness with which FSA regarded problems with PPI selling is clear from:

The three thematic reviews it undertook, in 2005, 2006 and 2007.

The largest programmes of mystery shopping ever conducted by the FSA.

The largest series of enforcement actions the FSA has ever pursued in relation to a single retail issue.

The option of banning sales of PPI—in particular the sale of single premium PPI—was considered during this period as one of a wide range of options, but was rejected on cost/benefit grounds in favour of measures intended to make the market for PPI operate more effectively.

The view of the FSA at that time was that the best solution to PPI mis-selling and to the consumer detriment arising from this mis-selling was to improve how the PPI market worked, in particular through PPI being bought from a range of “third party” providers. This would be similar to the way that thriving competitive markets for home and travel insurance had developed, from an earlier situation in which they were purchased primarily from mortgage provides and travel agents.

The question was how best to bring about such a market solution. Broadly speaking there were three choices. First, the industry could improve its own standards and move decisively towards putting in place the elements of a considerably more competitive market. Second, the FSA could—if justified by cost benefit analysis—introduce tougher requirements, ranging from better disclosure to the unbundling of PPI from the primary transaction. Third, the competition authorities could intervene, just as the Competition Commission had set out in 2005 remedies for the sale of PPI linked to store cards. In the event, the third route was followed, which led in 2009 to firms withdrawing from the sale of single premium PPI.

How far was your opinion of the regulation of bank sales practices of other products informed by the PPI experience during the period?

What changes were made to supervisory approaches with regards to bank sales practices in the period?

PPI experience was certainly an important aspect of the FSA’s overall view of bank sales practices during this period. Other information was gained from reviews of the selling of other products; from discussions with banks on Treating Customers Fairly; and from the supervision of individual banks.

In addition to the PPI-specific messages communicated through publicising the results of the thematic reviews, enforcement action and other means, the main shift in supervisory approach during this period relating to sales practices was the focus under the TCF initiative on whether banks (and other firms) could demonstrate that they were delivering the six “consumer outcomes” of:

1.Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

2.Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

3.Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

4.Where consumers receive advice, the advice is suitable and takes account of their circumstances.

5.Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and also as they have been led to expect.

6.Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

These outcomes were discussed with banks as part of the TCF initiative and as part of the risk-based supervision of individual firms. A series of targets were set for firms to demonstrate that they were delivering these outcomes, and that they had put in place management information to evidence this delivery.

The PPI mis-selling experience has been a catastrophe for consumers and banks. How far would you say this is a consequence of poor standards in bank management and boards?

The primary responsibility for the mis-selling of PPI must lie with bank senior management and boards. Specific problems here included:

1.Some banks did not comply with the detailed rules governing the sale of PPI. Misleading or inadequate information was given to consumers; PPI was sold to customers who were not eligible to claim under the policies; and in some cases customers were given the impression that taking out PPI was a condition of the offer of a loan. The senior management and boards of banks should have been aware of this—they were certainly made aware by the FSA of the market-wide problems uncovered by the FSA’s thematic reviews.

2.This was reinforced by an aggressive sales culture in which banks’ sales staff were heavily incentivised to sell PPI. Senior management and boards (in particular the board remuneration committee) could and should have given greater consideration to the incentive structures offered to customer-facing staff.

3.Banks did not (or did not do so with sufficient vigour and rigour) step back and ask themselves—as they were being strongly encouraged to do by the FSA under its TCF initiative—whether their overall approach, at all stages of the product life- cycle, would deliver the fair treatment of customers. The TCF initiative was based on a high-level FSA rule that a firm “must pay due regard to the interests of its customers and treat them fairly”. The six “consumer outcomes” (see above) were developed by the FSA to help firms to consider what they were doing to meet these outcomes and how they could measure their success (or otherwise) in meeting each outcome. This TCF approach was designed to be addressed and monitored at senior management and board level.

4.Many banks placed profitability ahead of compliance with FSA rules.

5.Once the problems in the selling of PPI were identified and communicated by the FSA (the results of the first thematic review were published less than a year after the FSA took on the regulation of general insurance) banks should have focused on how they were going to address these problems. But instead they devoted their attention to preserving profitable business through a mixture of denial, inaction, and vigorous push-back (including legal actions in 2009 and 2010 respectively against the Competition Commission and the FSA).

What was your desired strategic outcome during the period January 2001 to April 2008?

To what extent was this successful?

Did you alter your desired strategic outcome during this period? (Please explain if there was a change how this came about and what the change was)

With benefit of hindsight would you have taken a different approach at any point in the period?

During the relevant period of 2004–2008, the FSA’s retail agenda was to deliver an effective and efficient retail market for financial services and products, and through this a fair deal for consumers. This required:

capable and confident consumers, and clear, simple and understandable information provided for, and used by, consumers—hence the importance of the FSA’s financial capability initiatives during this period;

soundly-managed and well-capitalised firms that treat their customers fairly—hence the firm-specific and thematic supervisory work that focused on a combination of prudential and conduct of business issues, and that recognised the responsibilities of senior management and boards to deliver compliance with both the high level principles and the more detailed rules; and

proportionate regulation—as reflected in the development of the Handbook of rules and guidance, including the post-implementation review of the ICOB rules.

The challenges in the PPI market made it difficult to achieve this agenda.

First, consumers found it difficult to understand PPI, and to engage actively with a product that might be a “tertiary” purchase. The structure of the PPI market—with PPI linked so closely to the taking out of a loan—was not conducive to achieving good outcomes for consumers. Having bought a house, car or other item, and then arranged a loan to finance this purchase, consumers were understandably not very engaged when offered insurance on this loan. Most consumers also failed to recognise the potential benefits of shopping around for such insurance, and/or taking advice from an insurance broker, which allowed prices to remain high.

Second, as described above, many firms did not comply with the detailed ICOB rules and did not consider more generally how best they could treat their customers fairly. PPI was sold to customers who would not be eligible to make a claim; to customers who did not realise that taking out PPI on a loan was optional; and to customers who did not understand the product or its cost. In some cases this selling was aggressive and based on the provision of deliberately misleading information to customers, although the full extent of this did not become clear until much later. Many firms placed profitability above delivering good customer outcomes; incentivised their sales staff to focus on sales volumes rather than the quality of sales; and gave the impression that taking out PPI was a condition of obtaining a loan.

All of the initiatives taken by the FSA (and by the OFT and the Competition Commission) at the time were designed to make the PPI market work more effectively. The FSA’s initiatives included:

the three thematic reviews (and additional mystery shopping in 2008), which remain unprecedented in terms of the volume of work undertaken on a single issue;

the publicity given to the outcome of these reviews, and to the TCF initiative more generally, which could not have left any firm in any doubt about the importance attached to this issue by the FSA and the need for firms to review and amend their own procedures;

23 enforcement actions taken against firms for PPI mis-selling between 2006 and 2008; and

the review of the ICOB rules.

These initiatives did have a significant impact. Sales of PPI peaked in 2004, the year before the FSA became responsible for the regulation of general insurance, and declined steadily to half the 2004 level of sales by 2008. Moreover, the sales later in this period should have been more compliant.

With the benefit of hindsight the FSA might have acted sooner to introduce some of the remedies that were eventually introduced following the Competition Commission’s findings.

It would have been possible in theory for the FSA to have (i) introduced more radical changes to ICOB, which would have made it more difficult for firms to sell PPI and changed more dramatically the structure of the PPI market; and (ii) used its “variation of permission” powers to prevent firms from selling specific types of PPI (for example single premium PPI).

In practice, however, it is likely that the banks would have challenged the FSA—including through the legal system—had the FSA tried to follow one or both of these routes, not least on the grounds that the FSA could not demonstrate a convincing cost/benefit justification of such actions.

The FSA might also have focused earlier on the largest players in the PPI market, although at the time it was not clear how much consumer detriment was arising from the actions of these players. This only emerged clearly from the third thematic review and the subsequent mystery shopping.

Why, in your opinion, the FSA’s Principles for Business and associated work on Treating Customers Fairly was not enough to prevent mis-selling by the banks.

As described above, the FSA’s TCF initiative was designed to focus the attention of the senior management and boards of firms on whether they were meeting the high-level rule that they should treat their customers fairly. This was reinforced by including breaches of the TCF rule and other FSA Principles for Businesses in enforcement actions (including the PPI enforcement actions), either by themselves or in combination of breaches of detailed rules.

The FSA wanted firms to embed TCF into their culture and behaviours. The FSA emphasised that firms should undertake their own assessments of whether and how they were meeting this rule, and how this was evidenced by their management information; and that firms should address any gaps identified by this assessment. The six “consumer outcomes” were intended to help firms with this assessment, and to ensure that firms focused on all stages of the “life cycle” of a retail financial product or service.

When the TCF initiative was launched by the FSA many in the industry reacted by denial and resistance. For example, the Practitioner Panel (a statutory body under the Financial Markets and Services Act) argued that the FSA should not publish a paper entitled “Treating Customer Fairly” because this would imply that firms were not already treating their customers fairly.

Some firms did take TCF seriously and made significant changes to their business models, systems, controls and management information as a result. TCF reports continue to be a key item on the agenda of many firms’ board meetings.

Others, however, only paid lip-service to the TCF initiative, hiding behind elaborate TCF projects that did not deliver much by way of concrete outcomes.

FSA supervisors included TCF progress as part of their risk assessment of individual firms, but in the early stages of the TCF initiative it was often difficult to tell the difference between serious implementation and lip-service, particularly in large firms where any major change process would always take a number of years to take effect.

As described above in the specific context of PPI, the senior management and boards of many firms did not take TCF sufficiently seriously, and at the end of the day profitability took precedence over meeting FSA rules (both high level principles and more detailed rules).

28 December 2012