The UK’s Public Accounts Committee (PAC) has published its report on “Financial Services Mis-selling: Regulation and Redress“.
The Report examines and then criticizes the joint and several responses of the Financial Conduct Authority (FCA), HM Treasury, the Ministry of Justice, and the Financial Ombudsman Service (FOS) to (a) the mis-selling of more than 12 million payment protection insurance (PPI) policies; and (b) the volume of claims and complaints that followed.
The Report reaches 6 conclusions and makes 6 corresponding recommendations:
- Although it is “straightforward and free for … consumers to claim compensation through the [FOS]“, too many complaints have been made using claims management firms; and, as a result, too much of the redress that should have been paid to consumers, has been paid to claims management firms instead. In the PAC’s view, “the Treasury, the Ministry of Justice, the FCA and the [FOS] – [were] too slow in taking responsibility for this …, and too passive in allowing it to happen“, especially as the problem was “entirely predictable“. Unfortunately, “[a]ction now is too late but is still important“. So the PAC recommends that “HM Treasury and the Ministry of Justice … report publicly on the effectiveness of their actions in reducing the role of claims management companies ... The Treasury and the FCA should [also] demonstrate how they will ensure that these problems do not happen again …“;
- The FOS has a large backlog of PPI claims, and many consumers are waiting more than 2 years for a decision. In the PAC’s view, “the Ombudsman did not give a convincing account of why” this should be the case; and, although the FOS has said that it “aims to clear the backlog of older cases by July 2017″, it still hasn’t said how it will achieve this. So the PAC recommends that the FOS publishes, before the end of July 2016, “a clear timetable for reducing and … eliminating its backlog …, and … reports publicly on its progress“;
- Although the FCA has taken some action to tackle the cultural problems that cause or contribute to financial product mis-selling, it hasn’t done enough to “articulate … what culture it expects firms to have [or to] guarantee that any improvements … will stick as the regulatory spotlight moves away”. The FCA should therefore “outline the actions it will take to improve cultures in financial services firms, and report to [the PAC] on their effectiveness” in May 2017;
- The FCA “does not do enough to ensure that consumers understand the financial products they are buying and the possibility of claiming compensation“. In fact, it “emphasizes ensuring that firms adhere to detailed rules” instead. Furthermore, the FCA and FOS “do not appear to have sufficiently considered greater use of automatic enrollment of victims of mis-selling into compensation schemes“. The FCA should therefore say “what more it will do [to] ensure firms check consumer understanding of the products they purchase and of their rights to claim compensation”, and report back in 2017;
- The PAC also finds that HM Treasury doesn’t know how effective the FCA is at reducing the risk of mis-selling. So it recommends that “HM Treasury and the FCA should develop ‘real-time’ indicators of the extent of mis-selling, and assess regularly how effective their actions are in reducing it“; and
- The PAC expresses concern that Parliamentary accountability for financial regulation is being undermined because the National Audit Office doesn’t have the access it needs to FCA information. So it calls on HM Treasury to publish a timetable for proposing legislation to give the National Audit Office access to the information it needs to carry out full value for money examinations.
At first blush, some of this seems odd. The PAC’s functions include making sure that tax payers get good value for money, but the FCA and FOS are almost entirely funded by levies on the financial services industry, not the public purse. But that analysis may be too superficial: HM Treasury and the Ministry of Justice are publicly funded institutions, and their actions and apparent failures are closely connected with the actions and apparent failures of the FCA and FOS in these particular cases. It’s also true, of course, that whilst the contributor base is not exactly the same, some or all of the costs of funding the FCA and FOS are passed on by financial services firms to their customers, who are often UK tax payers as well. So the PAC’s interest isn’t as strange as it first appears; and whilst there could still be jurisdictional issues, if someone wanted to take the point … it’s therefore extremely unlikely that they will.
Although the PAC’s report, conclusions and recommendations rely heavily on the mis-selling of PPI policies; the responses of the FCA, Treasury, Ministry of Justice and FOS; and their joint and several failures; and he lessons to be learned, and the PAC’s recommendations, will have a much broader application than PPI mis-selling, in and of itself. We should probably therefore expect to see:
- The authorities trying to restrict the activities of, and/or the charges that can be levied by, claims management firms;
- The FCA trying to make, and asking firms to make, much greater use of the (so called) “automatic inclusion” redress schemes than we’ve seen before – at least when it’s sensible and proportionate to do so;
- (If the FCA chooses to follow the PAC’s recommendations slavishly), another set of changes to:
- The FCA’s conduct of business rules, as it tries to encourage firms to test their clients’ understanding of the products they’re buying (at least in the context of advised sales – although it might well try to go much further than that); and
- (Perhaps) changes to the documents that firms are expect to prepare and provide, to make it even clearer than it already is that claims and complaints can be made to the firm, and then to the FOS, without (at least in the ordinary case) the assistance of a claims management or other professional services firm.
At least at this stage, it’s hard to imagine how the FCA and Treasury will begin to develop real time indicators which show how much mis-selling is going on at any one time, and and how effective they’re being at managing and mitigating the risks. Let’s keep that one for another day.