Parliamentary Commission on Banking StandardsSupplementary written evidence submitted by the FSA

1. A summary of the reasons Lloyds TSB (LTSB) were referred to Enforcement following the FSA’s first thematic review into PPI

1.1 LTSB’s referral to Enforcement arose out of our thematic review of PPI sales, the report on which was published in November 2005.1 During May and August 2005, we visited 45 firms selling PPI. These visits primarily assessed the inputs by firms to meet our rules (their systems for compliance) rather than the outputs (whether actual sales were compliant).

1.2 In October 2005, we conducted a review of the material relating to the PPI visits to determine whether, in respect of each firm visited, there were circumstances suggesting breaches of the FSA’s rules and principles. In those cases where there were such circumstances, we assessed the relative seriousness of the cases amongst peer group firms. As a result of this peer review, we concluded that there were sufficient grounds to refer LTSB to Enforcement for investigation. The final decision to refer LTSB was taken by FSA senior management following consultation between Clive Briault and John Tiner. The concerns related to training and competence, compliance monitoring and sales processes and incentivisation in branches.

1.3 The investigation into LTSB commenced on 21 November 2005. The investigation was into the adequacy of the systems and controls LTSB had in place in relation to its branch sales of PPI products, including its training and competency arrangements and to determine whether any inadequacies identified had caused any customer detriment and/or created a risk of such customer detriment occurring.

2. A summary of the work Enforcement did once LTSB were referred to Enforcement (including a brief chronology)

2.1 The investigation focused on four areas of LTSB’s sales of PPI throughout 2005:

(1)Review of LTSB’s arrangements before the point of sale (including training and competence provisions);

(2)Review of LTSB’s systems and controls at the point of sale, including systems, processes and procedures, and the supervision, assessment, and incentivisation of staff;

(3)Review of LTSB’s post-sale compliance monitoring arrangements; and

(4)Review of files of customers who bought PPI and a customer contact exercise.

2.2 The investigation looked at documentation, interviewed some branch staff and examined 500 customer files. A customer contact exercise was also undertaken (conducted through LTSB rather than by the FSA).

2.3 Chronology of the investigation:

(1)November 2005—LTSB referred to Enforcement.

(2)January 2006—Formal complaint made by LTSB about grounds for referral (deferred until completion of the investigation and then not pursued).

(3)January 2006–July 2006—Several document requests made and complied with.

(4)August 2006—Branch Interviews took place.

(5)November 2006—Further document request for 500 customer files.

(6)December 2006–January 2007—Provision of the 500 customer files to FSA.

(7)April 2007—Proposal made by FSA to LTSB for a customer contact exercise.

(8)April–July 2007—discussions on methodology and scope of customer contact exercise.

(9)August 2007—customer contact exercise carried out.

(10)September 2007—results of customer contact exercise provided to FSA.

(11)January 2008—decision to close the case communicated to LTSB.

3. A summary of the reasons why Enforcement ultimately dropped its PPI LTSB enforcement case, including the key factors that were taken into account in that decision making)

3.1 The decision not to pursue disciplinary action was based on Enforcement’s assessment of the evidence gathered during the investigation. Specifically, Enforcement concluded that there were a number of weaknesses across various areas of LTSB’s procedures and controls relating to the sale of PPI during 2005. However, those weaknesses were not of a nature that would necessarily lead to a high probability of widespread mis-sales. The reviews of customer files and the limited customer contact exercise undertaken identified a large proportion of cases where it was not possible to determine whether the sale was suitable but a more limited number where the sale was apparently non-compliant. It was therefore concluded that it would not be possible on the basis of this evidence to bring a case against LTSB for mis-selling and that the weaknesses identified could be dealt with through supervisory action.

4. Reflections from the FSA about lessons learned from the PPI enforcement referral case

4.1 In this section we consider lessons learned from the LTSB case rather than PPI generally.

4.2 There are a number of areas where different steps could have been taken which could have increased the ability of Enforcement to identify evidence of mis-selling; for example, having a greater focus on what was actually being told to customers at the point of sale earlier in the investigation and a more robust customer contact exercise (controlled by Enforcement rather than LTSB). However, any customer contact exercise would still have been subject to the limitation of having to rely on customer recollections of historic events.

4.3 In subsequent mis-selling investigations (including those for PPI) there has been a greater focus on establishing the evidence at the point of sale where needed. For example, in the Alliance & Leicester case we obtained recordings of telephone sales.

4.4 There has been considerable change in the FSA’s approach to Enforcement since this time. The FSA used to describe itself as “not an enforcement-led regulator”. From 2007, the FSA commenced the strategy of “credible deterrence” through Enforcement. Margaret Cole (then Director of Enforcement) said of this strategy at the enforcement conference in June 2008 that enforcement is “a key part of delivering on our goal to achieve credible deterrence. FSA watchers will have noticed a shift in our emphasis. Today, we have a lot sharper focus on Enforcement as a strategic tool at the forefront of our drive to achieve ‘credible deterrence.’”

4.5 In 2006 the total penalties levied by the FSA were £13,309,143 and by 2008 had increased to £22,706,526. The total has increased every year from 2008—in 2012 the total penalties came to £312 million, including the largest penalty to date of £160 million against UBS in respect of LIBOR in December 2012. In addition, the FSA has since 2009 secured 21 convictions for insider dealing and pursued more cases against individuals. This approach to enforcement cases and the policy of credible deterrence has been rigorously pursued and will be continued and strengthened by the FCA.

4.6 In 2010, to bolster the credible deterrence strategy, the FSA introduced the new penalties regime designed to increase the penalties imposed in enforcement cases. In consulting on this new regime the FSA stated that one of the key drives for increasing penalties was that we had “repeatedly seen breaches in particular areas (for example the sale of Payment Protection Insurance and market misconduct) where insufficient account has been taken of previous enforcement action.”2

5. What was the involvement of the FSA Board in the decision not to proceed with the Enforcement case? If the Board were not part of the decision making process, please explain why this was the case?

5.1 The decision not to proceed with the enforcement case was taken by Executive management in the usual way, involving the Director of Enforcement as well as Supervision senior management. The FSA’s Board does not make decisions in individual cases.

28 January 2013