What has happened?

The FCA has recently come to an agreement with Affinion International Limited and 11 high street banks and credit card issuers, following voluntary negotiations, which will enable around two million customers to claim compensation under a Court scheme of arrangement if they have concerns about the way in which they were sold card security products. The card security products were provided by Affinion and distributed by the banks and credit card issuers and included the products: Card Protection; Sentinel; and Safe and Secure Plus.

What are the key points?

Customers who purchased or renewed the card security product between 14 January 2005 (when insurance mediation activities became regulated) and August 2013 from Affinion or one of the listed banks or card issuers are able to submit a claim. It is envisaged that (provided the scheme of arrangement is approved by eligible customers (who are the scheme’s creditors) and the High Court) customers entitled to compensation will receive the amount they paid for the policy (less any paid claims and taxes), plus 8% interest. This is expected to be paid later this year. A company called AI Scheme Limited will write to eligible customers to explain how the compensation scheme will work and the actions that they need to take. The scheme must be implemented by 31 October 2015.

Particular concerns of the FCA appear to include the way in which a feature of the card security product, that of insurance to cover fraudulent use in circumstances where the card was lost or stolen, was sold to customers.

For example, statements were made to customers that:

  • the product covered customers for up to £100,000 worth of unauthorised transactions occurring after the card was lost or stolen; and
  • the product covered customers for up to £5,000 worth of unauthorised transactions that occurred before they reported a card as lost or stolen.

The FCA has taken the view that this cover is unnecessary as the first type of loss is usually the responsibility of the card issuer and not the customer, and in relation to the second, the bank usually will cover customers for anything over £50. These features were removed from the relevant products between October 2012 and August 2013.

The increasing trend of early intervention.

An interesting point coming out of this is that the FCA has not conducted a formal investigation using its statutory enforcement powers in relation to this matter. Instead, it has used its supervisory powers to broker the deal without engaging in enforcement proceedings as part of its “early intervention” approach. The technical regulatory method that the FCA has adopted is that the relevant firms now have a requirement in their Part 4A permission to undertake a consumer redress scheme. The FCA is increasingly using these early intervention powers rather than launching formal proceedings in order to tackle significant issues which may give rise to a risk of consumer detriment or may damage the integrity of the market.

This is an increasing trend and one that firms should be aware of in their dealings with their supervisors. On the one hand, this approach has several benefits, for example it avoids protracted enforcement proceedings, provides customers with early redress and enables firms in broad terms to draw a line under the particular problem (in this case without admission of liability). On the other hand, firms may feel under undue pressure to deal with potentially very complicated issues in a hurry and with little realistic opportunity of challenging the FCA’s desired outcome in contrast with enforcement proceedings where the FCA’s decisions are more capable of challenge.