Parliamentary Commission on Banking StandardsWritten evidence from Jon Pain
General
An explanation of your role and responsibilities in relation to PPI throughout your time at the FSA
1. I joined the FSA as Managing Director of Retail Markets on 8 September 2008. In September 2009 my role changed to Managing Director of Supervision. I was appointed to the FSA Board when I joined the FSA and remained on the Board until 31 January 2011, when I left the FSA. As Managing Director, I had overall responsibility for regulating firms or groups whose business was predominantly with retail consumers. This included the regulation of high street banks, building societies, insurance companies, mortgage lenders, retail financial services intermediaries and approximately 17,000 smaller firms engaged in the mortgage advice, insurance broking and investment advice sectors. I also had responsibility for key consumer-facing functions such as the financial capability programme and the FSA Consumer Contact Centre. In addition I was responsible for Retail Policy and the Conduct Risk Department.
At what point was it clear to you that PPI was being comprehensively miss-sold?
2. On joining the FSA in September 2008, I reviewed the work of the Conduct Risk Dept in relation to PPI and the evidence from the thematic work and mystery shopping. This made it clear to me there were substantive mis selling issues relating to PPI.
What view the FSA had formed of the sales of PPI at the point you became Managing Director in July 2008?
3. The FSA’s successive thematic reports 2005–07 demonstrated widespread weaknesses in sales practices across much of the industry and it had identified that this presented a high risk to consumers.
4. However, the FSA had to take a proportionate and evidence-based approach. The FSA was concerned, certainly initially, that the strongest evidence it had collected, in the form of the mystery shopping work, was in relation to the sale of single premium PPI alongside unsecured loans, and that this might not, of itself, demonstrate the sort of widespread and regular failings leading to consumer loss within the whole PPI market that would justify pursuing a mandatory industry-wide mis-selling review.
5. At the time, the FSA’s thinking and which subsequently became its main focus was on the areas where mis-selling had a greater financial impact on consumers and where we had evidence; that of single premium personal loan PPI sold through branches.
6. We therefore took forward a robust discussion with major banks that had sold single premium personal loan PPI through branches about the need for them to conduct past business reviews of these sales and to consider stopping further such sales (which they did a few months later, in H1 2009).
7. In 2008 to 2009, we also established a complaints-led approach (consulted on in 2009, made in August 2010, in force in December 2010) that would ensure redress was available if there had been mis-selling of single premium loan PPI and other PPI types and channels of PPI sale.
Why in your opinion were banks not stopped from selling PPI during the period January 2001 to April 2008?
8. This period was before my time at the FSA however my view is that the focus during the period had been on:
Improving sales standards
Ensuring complaints about PPI were dealt with fairly and according to the prevailing FSA complaint rules and procedures.
The prevailing supervision approach at that time had not been to ban products but rather to focus on compliance with disclosure and point of sale requirements.
How far was your opinion of the regulation of bank sales practices informed by the PPI experience during the period?
What changes were made to supervisory approaches with regards to bank sales practices in the period?
9. The FSA’s historic approach to supervision had been not to intervene until significant evidence had been accumulated on an issue.
10. This changed and during the period up to 2010 the approach became increasingly intensive. Continued failures, such as PPI, MPPI, and complaints handling, all pointed to a lack of focus by firms on consumer needs. Indeed, product innovation led to more complexity and a focus on profitability, rather than a clear unambiguous focus on consumer needs.
11. In my speech, FSA’s Approach to Intensive Supervision in 2010, I set out that the overall approach was to focus on consumer outcomes, seeking to get firms to adhere to our conduct principles and treat their customers fairly. To deliver this the FSA needed to operate entirely differently, changing both our philosophy of “what supervision means” and our approach to and the use of resources. This included:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
12. During this period the FSA developed more intrusive conduct assessment tools to test sales practices. The FSA’s intention was to deploy more intrusive tools in the future, such as mystery shopping and file reviews and other techniques designed to test whether in practice firms were treating their customers fairly and otherwise complying with our conduct of business principles. The FSA wanted this more intrusive and challenging approach to make clear to firms that the FSA took compliance with its conduct of business principles very seriously.
13. We developed a more comprehensive conduct supervision approach built around:
More thematic interventions/reviews by the Conduct Risk Division.
Increased sales file reviews.
Business model analysis.
14. This new approach resulted in action such as the agreement with the industry to put in place a package of measures for consumers, including refunds of around £60 million to address concerns we had over increase in premiums and reduction in cover for mortgage PPI policies.
15. Much of the enhanced approach formed the foundations of the approach revised under the new FCA.
The PPI miss-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?
16.
17.
Chronological View of Supervisory Strategy
What was the rationale for the Mystery Shopping evidence gathering that started in February 2008?
Why in your opinion was this needed given three previous thematic reviews?
What new information did this mystery shopping exercise produce?
18. The third thematic review included 114 mystery shops on several large banks’ branch sales of single premium PPI alongside personal loans, carried out between 4 April 2007 and 23 July 2007. As with the previous thematic reports, the results were disappointing. Nearly all of the firms mystery shopped failed to satisfy the ICOB requirements.
19. Firms however were challenging the 2007 mystery shopping results as no longer reflective of their sales practices. Therefore the further 2008 exercise was initiated to
Test more current sales practices and:
Provide a wider sample from which to validate the extrapolation of the results across banks’ branch based PPI sales.
20. In light of this continued non-compliance the FSA signalled that it intended to escalate our response, including conducting further mystery shopping on this same type and channel of PPI sales, in order to gather additional evidence with the intention of using the results in robust significant interventions against firms where appropriate.
21. In 2008 we also discussed internally using additional tools, in particular our power to vary firms’ permissions so as to prevent particular firms from selling particular PPI products, pending evidence of improved sales practices. The consideration of such measures reflected our serious concerns about both PPI sales practices and the lack of response from industry.
22. During the first half of 2008, there were 271 mystery shops across several large banks responsible for the majority of face to face sales of single premium PPI on personal loans. This data was combined with the previous shops to make a total of around 400—by some margin the most extensive mystery shopping exercise the FSA had ever carried out.
23. Because of our intention to utilise the evidence from the third thematic project in potential significant interventions, if the mystery shopping evidence was adverse, and the likelihood of challenge by the firms concerned, the mystery shopping evidence was subjected to exhaustive assessment by forensic and legal specialists.
24. The results were very poor:
90% of advised sales “failed” on three or more key outcomes, whilst 62% “failed” on four or more;
86% of non-advised sales “failed” on three or more categories, whilst 27% “failed” on four or more categories.
25. In meetings with senior management of the firms during late 2008, we informed them that we regarded the shops as evidence of systemic non-compliant sales which would potentially support enforcement referrals if necessary and that they should therefore:
(a)
(b)
26. These banks agreed in January 2009 to cease these sales. Later in 2009, most of them agreed in principle to conduct past business reviews on these sales. However, further discussions with the firms on the detail, in particular concerning the applicable sales standards, got caught up in the subsequent judicial review by the BBA, and remained ongoing at the time of my departure from the FSA.
What was your desired strategic outcome for PPI during the period July 2008 to July 2010?
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?
In what way did your strategy differ from that in place prior to July 2008?
27. I revised the FSA PPI strategy in 2008 to achieve a substantive resolution to the PPI issue as progress had been difficult to achieve. This included:
Agreeing that despite the financial crisis at the time the Conduct Risk Division resources would be largely ring fenced to continue to focus on the issue.
Initiating a more intensive engagement with the industry to improve the sales standards.
An industry-wide approach to substantially improve PPI complaints handling—this led to the industry working group. This also included working closely with FOS.
Supporting the ongoing Competition Commission investigation into the PPI market.
Individual high level meetings (many of which I led) with banks to attempt to gain agreement to the banks undertaking a complaint-led past business sales review. But with the clear understanding we would use our FSA enforcement powers if agreement could not be met.
28. We also considered other options including a S404 scheme but concluded that the timescales and complexities involved made this an unattractive option to pursue.
29. As mentioned above, the key strategic focus switched from PPI mis-selling to ensuring fair redress for consumers. In autumn 2008 the FSA considered the evidence about potential consumer detriment from PPI mis-selling and the various actions it might take to address it, including a s404 scheme. The conclusion was that a package of measures centred on fair complaint handling was a better and proportionate choice.
30. The preferred approach was to combine specific action against some major firms, with improved PPI complaint handling for the industry in general, including the fair treatment of potentially affected consumers who had not complained. This approach was kept under review during the following two years.
When the Competition Commission published its market investigation, including proposed remedies in January 2009 what impact did this have on FSA supervisory activity?
31. On 29 January 2009 the Competition Commission published its final report, which confirmed the various market failures in the PPI market. Our strategy was to work closely with the Competition Commission to secure the changes their remedies proposed.
32. On 20 January 2009 Alliance & Leicester, Barclays, the Co Operative Bank, Lloyds Banking Group and RBS/Nat West announced they would stop selling single premium PPI with unsecured personal loans by the end of January 2009. Some of these firms, along with other market players, now offered or planned to offer regular premium PPI instead of a single premium product.
33. I had several discussions with banks on the implication of the CC final report and outlined why this made sense for banks on a voluntary basis agree to stop selling single premium PPI. On 23 February 2009, I sent a Dear CEO letter to all firms still selling single premium PPI with unsecured personal loans asking them to stop selling by 29 May 2009. Firms complied with this request.1 I have reproduced this letter at appendix 1.
At what point did you become aware of the judicial review sponsored by the BBA?
Please explain in your opinion the rationale for the banks via the BBA engaging in this Judicial review.
34. During various discussions with the banks and the BBA it was apparent that they were considering a judicial review.
35. We were formally advised of filing of judicial review proceedings in a letter from the BBA on 8 October 2010.
36. In answer to (a) above, the rationale as I understood was because the banks considered the FSA’s application of both its Principles and |Complaints policy framework to PPI was flawed. The banks believed this would deliver an outcome they would not accept and therefore wanted to challenge this through a judicial review.
The Impact of Regulations and Supervisory Activity
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 miss-selling and to what extent were they defective?
In what way did the thematic reviews inform the revision of the rules?
37. I was not at the FSA at the time the ICOB rules were changed, but I understand that there was no great sea change between ICOB and ICOBS and this was made quite clear within PS07/24 in response to comments from industry.
38. The basic scheme of ICOBS, both as consulted upon and as ultimately enacted, was simple. It followed the two-pronged approach by pruning away a significant number of the detailed ICOB rules in favour of increased reliance upon the content of the Principles, whilst providing additional detail in particular areas, specifically protection contracts (including PPI) where it was felt that additional rule-making was required in order to target poor practices. This was clearly set out in paragraph 1.9 of CP07/11.
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
39. Both the FSA principles and TCF framework were sound policy frameworks in their own right, but their effectiveness is totally dependent on firms embracing not only the explicit compliance of those policies but the spirit of what they were intended to achieve. Unfortunately this proved to be difficult to deliver and the root causes of why this the case are wide ranging and complex. In light of this the FSA approach became more intensive, with the increased use of enforcement as an effective deterrent.
APPENDIX 1
DEAR CEO LETTER FEBRUARY 2009
Jon Pain speeches
Restoring Confidence and Trust http://www.fsa.gov.uk/library/communication/speeches/2009/0919_jp.shtml
FSA’s approach to Intensive Supervision http://www.fsa.gov.uk/library/communication/speeches/2010/0518_jp.shtml
27 December 2012
1 http://www.fsa.gov.uk/library/communication/ceo/2009