In July 2008, the FSA fined Liverpool Victoria Banking Services Limited (LVBS) £840,000 for serious failings in relation to the sale of single premium Payment Protection Insurance (PPI). Margaret Cole has since confirmed that PPI will remain a top priority for the FSA in 2008 and beyond: "..all firms selling PPI must treat their customers fairly, including taking proper steps to make sure sales are suitable and customers are eligible to claim on the policy". The FSA has threatened tough action and higher penalties in future cases.
- PPI remains a top priority for the FSA.
- Firms should review the design of their sales process and their systems and controls:
- Risk of inappropriate sales Customers should be fully informed about the benefits, exclusions, limitations and cost of PPI. Firms must ensure that inducements and sales targets do not create risks of inappropriate sales of PPI.
- Non-advised sales Firms must establish tight controls to prevent sales staff from inadvertently giving advice.
- Advised sales Firms must record their suitability assessment in the demands and needs statement.
LVBS sold PPI in conjunction with unsecured loans on a non-advised basis through telephone sales. Between 14 January 2005 and 8 August 2007 (relevant period), LVBS sold approximately 14,500 PPI policies which generated a gross PPI income for LVBS of approximately £23 million.
FSA findings: PPI failings
The FSA found that LVBS' telephone sales process for PPI was flawed in its design, and that additional operational failures were not detected or remedied. In particular, the FSA identified the following failings:
- LVBS' sales process assumed that all customers would want PPI. When customers rang LVBS to apply for a personal loan, LVBS added the cost of single premium PPI plus interest to the quotation without the customer asking for it.
LVBS did not tell customers that:
- PPI was optional;
- there was an additional cost for PPI;
- the PPI was single premium; and
- the premium was added to the loan and attracted additional interest.
- When customers declined PPI, LVBS used "objection handling" techniques which put pressure on customers and carried a risk that staff would give advice. The risk of pressure selling was increased by financial incentive schemes, for example, LVBS' telephone sales staff received bonus incentives based on PPI rather than loan sales. The incentives were substantial: a sales person could make up to two thirds of his base salary through incentives for PPI sales. Telephone sales team leaders were also given incentives on the basis of the PPI sales of their teams, which created a potential conflict of interest with the supervision of staff.
- LVBS provided customers with inadequate information about the benefits, exclusions, limitations and cost of PPI. The failure to tell customers about the nature of single premium PPI and the cancellation terms (early cancellation led to the customer receiving significantly less than a pro-rata refund of the PPI premium and interest) was particularly serious as a large number of customers refinanced by taking out additional borrowing before the expiry of their original loans.
- LVBS regularly provided customers with information that was unclear, unfair or misleading: over 60% of sales calls reviewed by the FSA were found to be non-compliant in this respect.
- LVBS failed to monitor its sales staff effectively, for example, it failed to assess whether staff were checking customers' eligibility for PPI. The level of PPI sales monitoring was also inadequate: a sales person could sell PPI for months without being monitored. LVBS' failings resulted in breaches of Principle 3 (Management and control), Principle 6 (Treating Customers Fairly) and Principle 7 (Communications with clients).
The FSA found LVBS' breaches to be particularly serious as:
- the unfair treatment of customers arose mainly from the design of the telephone sales process;
- during the relevant period, LVBS made a gross PPI income of approximately £23 million; and
- the failings occurred against a background of high profile FSA communications highlighting the need for firms to ensure that PPI sales processes were meeting FSA requirements.
In determining the level of the penalty, the FSA also took into account mitigating factors, in particular:
- LVBS suspended and then ceased all PPI sales once concerns were identified by the FSA;
- LVBS exited the unsecured personal loan market at the end of 2007; and
- LVBS' remedial action plan, which included a proposal for the automatic refund to customers of interest charged on the PPI premium.
LVBS also agreed to settle at an early stage of the FSA investigation, thereby qualifying for a 30% reduction in penalty.
PPI continues to be a priority
It is fair to say that PPI has been on the FSA' s agenda for some time. The FSA has carried out three phases of thematic work on PPI; the results of the first phase were issued in November 2005; the most recent phase, the results of which were published in September 2007, found that while improvements had been made, further efforts were required. The FSA has also issued other PPI publications including a "Dear CEO" letter and a factsheet for small firms, and introduced new rules in its Insurance Conduct of Business sourcebook in January 2008 intended to improve PPI selling practices. The "Dear CEO" letter, published in November 2005, was of particular importance: its recommendations set the standards against which enforcement action has since been taken (for further details of the recommendations, see below). There has also been a steady stream of FSA PPI enforcement cases since 2006, and the fines imposed on firms have increased in line with the FSA's stated intention to impose higher fines where standards fall below required levels. In January 2008, the FSA fined HFC Bank Ltd £1.085 million, its highest PPI fine to date. The LVBS fine is also substantial; the fine would have been £1.2 million had LVBS not qualified for a 30% reduction in penalty for early settlement. Most recently, the FSA imposed fines totalling more than £175,000 on five motor retailers for PPI failings, warning that small firms for whom PPI sales are an ancillary business are subject to the same standards as the rest of the financial services industry.
The FSA has confirmed that PPI remains a top priority for the FSA: the FSA intends to publish the findings of its further follow-up PPI thematic work in the autumn, and will continue to bring enforcement actions where appropriate. PPI also forms part of the FSA's Treating Customers Fairly (TCF) initiative: firms are expected to have embedded TCF in all aspects of their businesses, including PPI, by December 2008.
PPI is not just a concern for the FSA: the Competition Commission is also looking at PPI. In June 2008, the Commission issued a report setting out the provisional findings of its market investigation into PPI and proposing remedial action for firms to take to address competition concerns, for example, providing customers with better information about PPI. A final report is expected to be published in November or December 2008.
Given the ongoing focus of the FSA and the Competition Commission on PPI, it is likely that the Financial Ombudsman Service will see its PPI complaints rise as consumers become increasingly aware of regulatory concerns.
Key messages for PPI firms
The LVBS final notice contains key messages for firms selling PPI:
- Involve the compliance function at all stages in the sale of PPI, including the design of the sales process as well as monitoring sales.
- Ensure that customers are told that PPI is optional; the sales process must not assume that all customers want PPI.
- Provide customers with sufficient and clear information about the product, including the cost, benefits, limitations and exclusions.
- If PPI is sold on a non-advised basis, ensure that advice is not in fact given.
- Ensure that financial incentives for staff do not create a risk of inappropriate sales.
- Staff should be monitored effectively and at an appropriate level.
- Pay attention to FSA guidance, in particular, FSA reports on thematic work and "Dear CEO" letters.
These messages repeat many of the recommendations set out in the November 2005 "Dear CEO" letter. Other recommendations made by the FSA in the letter include the following:
- Where advice is given, the customer's needs must be fully assessed and the firm's statement of demands and needs should record the suitability assessment.
- Staff must be sufficiently competent to sell PPI and their competence should be reviewed regularly.
- Management information is important for compliance monitoring and distributors.
The FSA clearly considers that firms have been given due warning of its concerns, and states that it will seek to impose higher fines for PPI failings. In the LVBS final notice, the breaches were viewed as particularly serious as they arose against a background of relevant FSA guidance.
One area which is absent from the LVBS enforcement action, however, is the role of senior management. To date, the FSA has fined two senior executives for PPI failings, most recently Paul Briant, the CEO of Land of Leather Limited. If sales practices in the PPI industry do not improve, the FSA may bring more enforcement actions against senior executives (provided, of course, that it is appropriate to do so).
FSA proposals for Own Initiative Variations of Permission (OIVoPs)
One interesting feature of this case is that when the FSA first notified LVBS in August 2008 that it was being considered for referral to Enforcement in respect of serious PPI failings, LVBS suspended its sales of PPI the following day and then ceased PPI sales altogether. It is not clear from the final notice whether this was at the FSA's request, though this is a reasonable assumption.
The FSA might have achieved the same result by using the procedure to vary LVBS' permission on its own initiative. However, the FSA's OIVoP policy at the time would have precluded it from doing so as LVBS was ready and willing to take the action in any event.
Had the FSA's proposed amendments to its OIVoP policy as set out in CP08/10: Decision Procedure and Penalties Manual and Enforcement Guide Review been in place, it could have opted to take this route, although it is interesting to consider whether the FSA could have worked through its procedures to obtain the requisite approvals as quickly (within 24 hours). It seems likely that the FSA would have been satisfied that the variation was necessary to protect existing and potential LVBS customers from mis-sales. Significantly, the FSA would have been able to publicise its concerns nearly 12 months earlier, although arguably the FSA would still have had to work through the enforcement process before it could formally and publicly declare that LVBS had contravened requirements imposed by or under FSMA, and certainly before any fine could be imposed.
LVBS also put forward proposals for a substantial and comprehensive customer redress package, which involved an automatic refund of interest and did not require customers to make a complaint. It would have been difficult, though not impossible, for the FSA to have secured as good an outcome through the use of its compulsive OIVoP powers.
It will be interesting to see whether the FSA implements the proposed changes to its policy on the use of OIVoPs, and if it does, whether the outcomes achieved are measurably different in terms of timing and quality.