Highest ever PPI fine
FSA yesterday fined Alliance & Leicester ('A&L') £7 million for serious failings in its telephone sales of PPI. The figure dwarfs the previous record for a PPI penalty (which was just over £1 million) and reflects FSA's repeated objective of creating a credible deterrent. FSA's announcement of the penalty follows a PPI update in September in which FSA highlighted several areas where PPI sales continue to fall short of its standards.
Breaches of Principles
Between January 2005 and December 2007 A&L sold around 210,000 single premium PPI policies on an advised basis over the telephone. It offered the PPI with unsecured personal loans.
FSA identified breaches of Principles 3, 6, 7 and 9.
Principle 3 – A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems
Compliance Monitoring – The PPI sales process was flawed. Monitoring checks did not take proper account of risks and did not identify the flaws. For example, the programme for monitoring advisers was effectively an assessment of their sales technique as opposed to their FSA compliance.
Senior Management Reporting and Response – The MI was generally inadequate for identification of the problems. Even where compliance reports highlighted problems A&L did not properly address the issues raised. Finally, a written assessment of loan protection PPI sales that A&L carried out following an FSA Thematic Report did not correspond with the sales process in place.
Principle 6 – A firm must pay due regard to the interests of its customers and treat them fairly
Optional Product – A&L trained its advisers to sell 'assumptively' (working on the basis the customer did need PPI and automatically including it in the quotation). Advisers followed a 'Call Guide' as their principal sales guide. Parts of the Guide were compulsory, but most of it gave advisers discretion on what to say.
While A&L did offer a bundled PPI product as well as a policy only providing life cover, it offered only the more expensive bundled product initially. It only offered customers the life product if the customer persistently turned down full coverage. Advisers did not offer or explain the option of taking no PPI.
Remuneration – Advisers were eligible for significant bonuses for PPI sales. The incentives were much larger than those for selling the associated loan. For example, in 2007 advisers receiving incoming calls needed to sell six loans without insurance to achieve the same bonus that they would receive from only one sale with the bundled product. In addition, advisers knew they would suffer a 25% penalty to their bonus if they did not meet the set PPI targets (which were around 50 – 55%).
These factors together meant advisers gave unfair, misleading or unbalanced information, ignored reasonable questions from customers and would not take "no" for an answer.
Principle 7 – A firm must pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading
Price – FSA found many instances of calls in which no quote for a loan was given to the customer without including PPI, although A&L did provide this information in pre-contract written information once the customer accepted the PPI recommendation.
Nature of single premium – Usually FSA found that an adviser did not explain the single premium was added to the loan so it would attract extra interest over the life of the policy. There was also a general failure to explain the level of refunds if the customer cancelled the PPI during the life of the product.
Policy exclusions – In several instances, FSA found advisers either did not tell the customer about any policy exclusions or gave misleading or inaccurate information about exclusions.
Principle 9 – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgement
A&L had inadequate systems and controls to ensure that advisers gathered and analysed enough information on a customer's demands and needs when recommending PPI. This was particularly evident in relation to:
- a customer's future needs and circumstances (such as where they expected to repay the loan early);
- alternative means a customer may have had to protect the loan (such as existing policies or other assets);
- the type and level of cover needed by a customer; and
- explanation of significant limitations and exclusions (in particular, advisers did not understand what a "pre-existing medical condition" was. This was the reason for many rejected PPI claims)
Lessons for the industry
FSA is annoyed industry has not taken to heart its many warnings about PPI sales. Of course, the A&L investigation started long before FSA's September Thematic update. But equally clearly, previous FSA communications should have left the industry in no doubt of its views on sales techniques like these. The longer FSA investigates PPI, the harsher the penalties are likely to be.
It is critical that any firm that sells or sold PPI, especially as part of a bundled product:
- reviews its procedures, systems and controls for compliance with relevant FSA rules;
- assesses all FSA's communications and documents its reactions and actions;
- reviews assurances it has given FSA; and
- takes action now to improve its processes, systems and controls and to investigate any potential consumer detriment from past sales.