Two notable recent fines, £2.8m levied against Policy Administration Services for poor complaints handling in relation to mobile phone insurance and £7.38m levied against Swinton for aggressive selling of add-on insurance, have a key common feature. The firms were not just required to conduct a root cause analysis and put matters right but were required to pay redress to customers adversely affected by the issues in the past, whether or not they had complained.
In Swinton's case, the sale of personal accident, home emergency and motor breakdown policies over a two year period resulted in an estimated repayment of £11.2m being required, as well as the fine.
The failing here was an aggressive sales strategy aimed at boosting sales, with the customer not being given adequate information about the products. The fine was heavily discounted however, to reflect Swinton's cooperation in badgering customers to respond to the offer of compensation, raising the customer response from a uninterested 1.5% of customers asking for their money back to 12%.
The FCA's reviews, in its short life, have been prolific. In his speech to the ABI Biennial Conference on the FCA's first 100 days, Martin Wheatley, Chief Executive of the FCA, described the FCA as a "very different animal" to the FSA. The FCA has been making extensive information requests from the London Market, citing its interest in conduct risk, suggesting the pace of reviews will not slow.
Since April, firms would have been worrying in the boardroom about reviewing all their sales practices and literature on motor legal expenses insurance, undertaking an extensive review into fairness in claims handling, reviewing all add-on products sold through third parties with consumer products (such as gadgets, mobile phone and holidays), and reviewing the basis on which they remunerate and delegate authority to brokers. Good job they are distracted from making money, since the FCA doesn't particularly want them to. One of the FCA's objections in the Swinton final notice was the fact that they raised £92.9m (with a 30% profit margin), in two years of selling add-ons.
What will be the impact of the reviews? Do consumers really care if the product they purchased had some additional protection they did not avail themselves of, provided the product was cheaper than the next?
Consumers care about the price of the product. Which is why, despite endless campaigns to retain customers and create loyalty, despite pockets of excellence in claims handling (the only real measure for a consumer of the worth of an insurance company) consumers still move to a new insurer to save fifty pence. The extent of the cover is not typically the driver. So if a home policy with legal expenses cover, boiler care and accidental damage is £20 more than the same product without these features, they'll consider moving.
There are however, learnings to be taken on board from the Swinton case where there was some sharp behaviour. Firms selling add-on products should ensure:
- Compliance monitoring should be in relation to the core products and the add-on products.
- The customer should be made aware that the cover is separate and not compulsory (so ask "you also have an option to take PA cover" not inform "you've got 3 months' free PA cover").
- The key terms and exclusions of the product should be explained prior to purchase.
- Sales staff remuneration should not be structured in a way which motivates inappropriate sales practices.
- If different levels of cover are available, the customer should be informed of them all.
- If any free period is offered, customers must be reminded of its pending expiry.
- Cancellation rights must be explained.
- Board management information on all of the products must be sufficient to enable those responsible to identify customer detriment and regulatory risks.
- Ignore internal adviser concerns about mis-selling at your peril!
The problem is of course that all reviews come at a cost. And with the risk of fines, that cost is considered to be an evil necessity. Who then pays for the cost of reviewing thousands of cases, pulling endless files out of archive and trawling through telephone recordings? The consumer of course. It is naïve to suggest that this additional cost burden is one which can be borne by shareholders, or employee redundancy programmes. And so premiums increase and the consumer pays. Martin Wheatley, Chief Executive of the FCA recently commented "We want consumers to be in a position to drive healthy competitive markets so that they become the new normal." I couldn't agree more. But healthy competitive markets require stability and for firms to be able to "put the consumer first … [or] exit" requires proportionality and measure.
Wouldn't it be more proportionate to educate consumers on potential product failings and ask the consumer whether the product represents good value for money and whether consumers understand what they are getting with their policy? It would then be for the consumer to determine if the outcome was fair to them. Or alternatively focus reviews on the firms where complaints have been received or internal compliance or audit reports suggest failures in sales practices?
With FCA reviews costing vast amounts of time and money, regulatory intrusion on intermediaries and insurance increasing more than any other regulated sector and the internal costs of compliance having an impact on profitability, for the organisations that demonstrate best practice as well as those that fall short, the outcome is simple. It is becoming increasingly unaffordable and uncomfortable doing insurance business in the UK.