The Financial Conduct Authority (the FCA1) continues to emphasise the importance of proper complaint handling by firms. Its recent £2.8 million fine of Policy Administration Services Limited (PAS) highlights the need to have a robust process from initial customer contact, through to effective "root cause analysis" of complaint data.
PAS provides mobile phone insurance policies through its appointed representative, Phones 4u. Under its arrangements with Phones 4u, PAS is responsible for handling all aspects of customer complaints, whether policies are bought by customers from PAS direct or from Phones 4u. Over the period from June 2009 to September 2011, PAS sold 1.6 million mobile phone insurance policies. For the period 1 January 2010 to 28 July 2011, the sample period used by the FCA, PAS recorded 7,024 complaints, which equated to 0.58 per cent of sales. It rejected 3,652 of these, although it paid compensation to 22 per cent of these customers. On these statistics alone, there was no obvious cause for concern. However, the FCA found that deficiencies in PAS' complaints records meant the statistics did not reflect the true number of complaints. Further, PAS had not been investigating complaints properly and did not hold the right information to carry out effective root cause analysis.
As a consequence of its complaint handling failures, the FCA found PAS to be in breach of Principle 3 (the requirement that a firm take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems); and Principle 6 (the requirement to pay due regard to the interests of its customers and treat them fairly).
In light of the FCA's fundings, firms would be advised to observe the following points in their complaint handling:
- regardless of what has to be recorded and reported to the FCA, firms should make a record of every complaint, the outcome and how it was reached, regardless of how the complaint was raised and how quickly it was resolved;
- the manner in which complaints are received, logged, investigated and dealt with should be standardised and consistent. Decisions should be supported by clear and logical reasons;
- "goodwill payments" cannot be used to avoid proper investigation and the need in appropriate cases to accept the firm got it wrong;
- analysing (accurate) complaint data to identify and then address recurrent themes is as important as ensuring individual customers get a fair outcome.
Regulatory background: FCA focus on complaint handling and mobile phone insurance
In April 2010 the FCA published its review of complaint handling in banking groups. The findings of that review were stated to be relevant to all firms handling complaints. Following on from that review and other specific reviews (PPI and bank charges complaints), proper handling of complaints has remained an important focus for the FCA, given its importance in achieving fair outcomes for consumers. The recent fine of PAS is the third fine this year (and the second substantial one) for complaint handling failures.
The FCA has also been focusing on the mobile phone insurance sector. In June 2013, the FCA published a thematic review entitled "Mobile phone insurance – ensuring a fair deal for consumers". The review identified a number of failings in the mobile phone insurance sector, including poor sales practices and unfair and slow claims handling.
Where did PAS go wrong?
Complaints records did not reflect the true number of complaints
The DISP section of the FCA handbook sets out the requirement for firms when handling complaints. DISP 1.5.1R provides that certain parts of the rules do not apply to complaints resolved by close of business on the day following receipt. The parts which do not apply include: the requirement to keep a record of all complaints received; the steps taken to resolve them and to retain that record for a specified period (the Complaints Record Rule); and the requirement to provide reports to the FCA on complaints received. However, the accompanying guidance to DISP 1.5.1 confirms that such complaints still have to be dealt with in accordance with the complaint resolution rules2.
When a customer made a complaint, PAS had a system for allocating complaints. The customer services team dealt with the initial call, immediately passing on mis-selling complaints to customer relations. The customer services team tried to resolve all other complaints and, only if they failed to do so, did they refer the complaint on to customer relations. The FCA Final Notice reports that PAS only formally logged the complaint when it was referred on to customer relations. PAS had a guide which set out its processes for investigating and resolving complaints. The guide was clearly drafted having regard to DISP, in that its complaint definition almost replicated the complaint definition in DISP. However, PAS' definition went on to exclude telephone complaints resolved the same day. Finally on the process front, contrary to the arrangement with PAS, Phones 4u dealt with some complaints itself, rather than referring them on to PAS.
PAS' complaints handling process meant that PAS' complaints data did not include (at least) any complaints dealt with by Phones 4u, and any telephone complaints resolved the same day, which were not classed as complaints (although the complaint was recorded against the customer file)3.
Having regard to DISP 1.5.1R, PAS might well have thought that it was not required to record complaints resolved the same day. However, the FCA considered that not recording these complaints presented a risk that PAS would not handle these complaints in accordance with DISP, or could not demonstrate that it had done so, which in turn presented a risk that PAS did not treat customers who made complaints fairly. It was not sufficient for PAS to have made a note of the complaint on the customer's file.
DISP requires complaints handling to include management controls to identify and remedy recurring or systemic problems4. The FCA found that omissions from PAS' complaints data meant that management information about complaints was inaccurate, and may have given management the wrong impression about customer response to the products and services provided. Management information should include complaints resolved by the firm by the end of the business day after receipt, even if these do not form part of FCA reporting.
The FCA's findings in relation to PAS' complaints data recording serves to remind firms that they need to keep a record of all complaints, whether or not they are required to do so under the Complaints Record Rule, or include those complaints in FCA reporting. If they do not record all claims, firms may be unable to demonstrate proper handling of complaints or robust management analysis of complaint data, leading to risk management and TCF failings, in breach of Principles 3 and 6.
Complaints were not properly investigated or decisions consistent
Firms are required to investigate complaints "competently, diligently and impartially" and assess them "fairly, consistently and promptly"5. The FCA guidance says that a factor relevant to assessment of a complaint may be similarity with other complaints received by the firm. The FCA found a number of failings in the way PAS investigated and resolved complaints, including little evidence that a proper review of sales took place and an inconsistent approach to dealing with similar complaints.
A particular point of concern, illustrating poor practice and inconsistency, was that in a number of cases (but not all) PAS placed significant importance when deciding whether the policy was mis-sold on whether the customer had signed a direct debit mandate. If so, PAS' practice was to reject the complaint on this evidence alone. For reasons that are not apparent, PAS contended that signing a direct debit mandate meant the customer had agreed to purchase the policy and it had not been mis-sold.
PAS was further criticised for its use of payments to customers to resolve complaints without proper investigation, and again, inconsistently so. The complaints sampled by the FCA included complaints where customers were given full or partial refunds, or payments as a "gesture of goodwill", whilst PAS recorded the outcome of the complaint as unjustified. There was no evidence these complaints were properly investigated. The FCA also noted there seemed to be no logical difference between use of "gestures of goodwill" and "refunds" and no explanation why some customers received full and some partial refunds. Added to this, the FCA considered that PAS was wrong to hold some of the complaints unjustified.
The nub of the FCA's concern about PAS' use of goodwill payments is that it meant PAS did not investigate complaints, and did not properly record and therefore report outcomes and how they were reached. Some customers may have benefited from this approach, receiving payments where their complaint would have been rejected if properly investigated, or receiving payment earlier. However, it is clear from the FCA's criticism of PAS that it is unacceptable for firms not to investigate complaints properly and, as part of that, to accept complaints where they are justified, rather than hiding behind goodwill payments. Where a firm rejects a complaint, but decides to make a goodwill payment, the complaints reporting rules in DISP allow the firm to class that complaint as a "reject". However, the reporting approach does not excuse a firm from investigating the complaint.
Failing to get to the root of the problem
As a further consequence of not investigating complaints, PAS did not have management information available to identify any recurring problems. PAS identified 68 per cent of the complaints sampled by the FCA as mis-selling complaints, and yet did not identify these as "recurrent" or "systemic". This failing, compounded with gaps in its complaints statistics and its recording of valid complaints as unjustified, led to the FCA finding PAS in breach of its obligations under DISP 1.3.3R to "put in place appropriate management controls and take reasonable steps to ensure that in handling complaints it identifies and remedies any recurring or systemic problems".
These failings supported the FCA's finding that PAS had breached Principle 3. The management controls to handle complaints which PAS had in place were found by the FCA to be inadequate for the purpose they served. PAS did not accurately record or fully investigate the complaints that were made and evidence of how outcomes were reached was lacking. The data available to management was flawed in a number of respects. Part of the reason for the substantial fine levied on PAS was that its failings continued for more than two years. If PAS had had proper systems in place, failings could have been identified and addressed earlier.
The fine imposed on PAS
PAS was fined £2.8 million for its complaints handling failures (taking into account a 30 per cent discount for early stage settlement). The fine is substantial, taken alone, or in the context of other fines this year for complaints handling failures: in January, the Co-operative Bank (Co-op) was fined £113,300 and, in February, Lloyds TSB was fined £4.3 million, in both cases for failures related to handling complaints arising from PPI sales.
The FCA calculates penalties by reference to a five-step process contained in the DEPP section of the FCA Rules (DEPP)6. The fines imposed on PAS, Co-op and Lloyds, all for complaints handling failures, demonstrate the flexibility in that process and the different outcomes it can produce. In these cases it is the application of "step 2" which provides cause for comment. Under step 2, the FCA determines a figure to reflect the seriousness of the firm's breach. For the purposes of comparing the three fines, the following points are relevant:
- the default for identifying the base figure for a fine is the amount of revenue generated by the firm from the relevant product or business area over the period of the breach, on the basis this revenue will in many cases be indicative of the harm the firm's breach may cause;
- if revenue is not an appropriate indicator, the FCA can use an "appropriate alternative"; and
- once the FCA has determined the relevant revenue it decides what percentage of that revenue will form the basis of the penalty, considering the seriousness of the breach. The percentage scale is between 0 per cent and 20 per cent (levels 1-5), in increments of 5 per cent.
The Co-op fine, the earliest of these three fines, was for failing to progress PPI complaints. The FCA determined that the Co-op's revenue from PPI sales was not an appropriate indicator of the harm its breach caused. The appropriate alternative was a percentage of the redress paid on complaints affected by the breach. This figure came to £3.2 million. The FCA then applied the usual percentage scale and considered 5 per cent (level 2) to be the appropriate percentage, giving a figure of £161,000 (to which a 30 per cent early settlement discount was applied).
Lloyds' failure related to it not paying redress promptly to PPI complainants. When it came to calculating the fine, the FCA again decided that revenue from sales of PPI was not an appropriate indicator. Instead, the FCA took as its base figure the amount of interest paid to customers affected by Lloyds' breach. The base figure was £1.8 million. The FCA then decided that the serious of the breach was level 2, but it then departed from DEPP, where a level 2 breach translates to 5 per cent of the base figure and used a different scale, imposing a multiple of 3 for a level 2 breach7, resulting in a step 2 figure of £5.6 million. This figure was then increased by a further 10 per cent for aggravating factors, and reduced by 30 per cent for early settlement to reach the final amount of the fine.
For the purposes of calculating PAS's fine, the FCA did not depart from the default approach. It considered that the amount of revenue generated from sales of mobile phone insurance over the relevant period was indicative of the harm caused by the breach. The relevant revenue for all sales in the relevant period was £33.4 million8. The FCA then determined the seriousness of the breach was level 3, translating to 10 per cent of the relevant revenue, £3.3 million (to which the 30 per cent early settlement discount was applied).
Having regard to the facts underlying PAS' breaches and the different approaches the FCA had been willing to take when penalising Lloyds and Co-op, it is unclear why revenue from all mobile phone sales during the relevant period was considered to be the appropriate indicator of the harm caused. There is no suggestion in the Final Notice that there was in fact systemic mis-selling or that the product was inherently flawed. PAS recorded 7,024 complaints in respect of about 1.2 million sales in the sample period considered by the FCA, 0.58 per cent. Whilst its complaints numbers may have been inaccurate, and there were clearly a number of failures in handling those complaints, a penalty calculated by reference to 100 per cent of sales, does in this instance appear to be unduly severe.