HomeServe, an insurance intermediary which sells home emergency and repairs insurance cover, has received the largest retail fine to date of £30,647,400 (reduced from £42,782,058 for early settlement). The catalogue of compliance and regulatory failings spanned a period of six years, dating as far back as 2005 when the firm was first authorised by the now defunct FSA. Broadly, the investigation found that HomeServe had breached Principles 3 (management and control), 6 (customers’ interests) and 7 (communications with clients) of the Financial Conduct Authority (FCA) Principles for Businesses. This considerable fine clearly demonstrates the regulatory appetite in the UK for enforcement against firms’ poor conduct.
Oversight of sales practices
HomeServe enjoyed rapid growth and, by 2011, had sold approximately 12 million policies to its sizeable retail customer base. The firm’s sales strategy focused on volume at the expensive of quality and customer need. This fine illustrates how ineffective oversight of compliance issues at board level leads to significant failings further down the business. Compliance monitoring reports raised serious concerns relating to treating customers fairly (TCF), poor sales techniques, providing customers with misleading information and mis-selling, however, not all reports were discussed at board level and insufficient attention was paid to those that were.
In the clearest indication of the firm’s lack of regard for compliance issues, the role of ‘legal and compliance director’ ceased to exist in September 2010 leaving no dedicated compliance representation on HomeServe’s board. From that point on, a senior compliance staff member attended board meetings, as an observer, to answer any compliance questions. The governance structure was such that issues discussed at Compliance and Risk Committee meetings, such as agents providing customers with misleading information, were not subsequently raised at full board meetings. HomeServe has acknowledged that the compliance team was not given ‘sufficient weight’ to raise serious issues and ensure their significance was understood.
The most serious mis-selling cases occurred in relation to two very similar products offered by HomeServe. These products, typically sold over the telephone, were complex in nature covering multiple elements and contained numerous exclusions. The FCA’s investigation into the firm’s sales practices found that customers were not given sufficiently clear information about the scope of cover, eligibility to claim, exclusions and cost. In October 2011, a year after concerns were first raised, HomeServe suspended all telephone sales following an independent report that identified serious issues regarding the quality of such sales. The redress bill for mis-selling these products is expected to run to £14.03 million.
During two particularly busy periods when HomeServe experienced an increase in claims and complaints, a fast track process was implemented for certain complaints which focussed on reducing complaint numbers quickly, as opposed to treating customers fairly. Significantly, senior management rejected a request from the complaints handling team to re-deploy some sales staff to deal with the high volume of complaints, deciding that achieving sales targets was more important.
The final notice cites various inadequacies of the complaints handling process and HomeServe has paid over £1.3 million in redress to those customers that suffered detriment. In particular, the firm failed to comply with DISP rules that require firms to investigate complaints competently, diligently and impartially and offer redress to the customer if it is decided that this is appropriate. Many complaints settled using the fast track process were not investigated at all and were instead resolved simply by negotiating with the customer.
HomeServe’s remuneration schemes and payment structures were complex and varied between each of the sales departments. Sales agents were heavily incentivised and rewarded predominantly on the basis of volume of products sold rather than quality of sales. Examples include a ‘sales per hour’ rate, a ‘£s for closures’ incentive scheme and a ‘quality bonus’. In addition, commission deductions for sales that failed to meet the required quality standard were ineffective to incentivise staff to maintain appropriate standards.
Regulatory training provided to senior management was ‘at best, limited, ad hoc and dependent on the individual, but more often on-existent’. Consequently, regulatory risks were not understood at senior level and there was a widespread lack of regulatory knowledge. Senior management attached little importance to the regulatory objectives, as reflected by the firm’s profit driven culture. In terms of training and competence, the message for firms is clear: TCF must be ingrained from the top down; senior management should have adequate knowledge of regulatory risk and possess clear understanding of the controlled function held and corresponding responsibilities; and the implications of being a regulated firm must be considered across all levels of the organisation.
The FCA also found fault with the firm’s IT systems. HomeServe failed to maintain adequate IT systems and, consequently, a coding error that led to 34,859 customers being overcharged went undetected for over four years. For a period of six years, IT software intended to prevent overlaps in cover failed to do so leading to some customers being sold multiple insurance policies resulting in duplicate cover.
This is the latest in a string of mis-selling fines for intermediaries but the systemic and widespread failings detailed by the FCA serve to reinforce the emphasis it places on culture, consumer needs, board oversight and regulatory training; and offer a stark reminder of the consequences for failing to take compliance issues seriously.