With £24.8 billion having been paid in compensation between January 2011 and June 2016 for the mis-selling of payment protection insurance (PPI), it is easy to see why the PPI issue often comes under the microscope.
2016 has been no different, with both the National Audit Office (NAO) and the House of Commons Committee on Public Accounts (the Committee) having issued reports on the subject. This time the focus was on the handling of PPI complaints by the regulatory bodies involved, namely the Financial Conduct Authority (FCA), the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS). The resounding message is that there is ‘room for improvement’.
National Audit Office Report
The NAO published its report in February 2016, the scope of which was to assess how these bodies coordinate their activities with respect to mis-selling; how the FCA acts to prevent and detect mis-selling; and how redress is provided to customers.
In terms of working towards prevention, the NAO commented that the FCA tends to lack evidence on whether its actions are reducing levels of mis-selling, but recognised that the FCA is now taking a more active approach in identifying and responding to risks, such as by using its early intervention powers. Indeed it used these powers 43 times in relation to cases of mis-selling between 2013-2015, including stopping the sale of contingent convertible securities to retail consumers.
With regard to redress, while the NAO noted that complainants on the whole were positive about the quality of the FOS adjudications, it was clear that the FOS had struggled with the sheer volume of complaints received and that more needed to be done to clear the backlog.
Between 2010 and 2015, the FSCS, responsible for paying compensation to claimants when authorised firms default, has paid £898 million to consumers relating to mis-sold financial products. Interestingly, the FSCS complained to the NAO that inadequate professional indemnity insurance is an important reason why it is often unable to recover more, with some insurance contracts explicitly disallowing payments to the FSCS in the event of failure. The FSCS has raised the problem with HM Treasury and the FCA, so this may be an issue to watch in the future for PI insurers.
The FCA is supportive of the NAO’s conclusions, emphasising the role that the FCA’s thematic reviews have to play, alongside increased fines and redress payments, in trying to discourage firms from mis-selling products. However, the FCA recognises that mis-selling will probably never entirely be eradicated.
House of Commons Committee on Public Accounts Report
Following on from the NAO’s findings, the Committee issued its more emotive report in May 2016, having appeared to have honed in on a particular issue flagged by the NAO report regarding the role claims management companies have played in the PPI space. Indeed, the Committee expressed their “disappointment” at the profiting by such claims management companies out of PPI claims and felt that regulators should be doing more to help consumers.
Although the FOS service is intended to be straightforward and free, according to their figures, claims management companies have taken up to £5 billion out of compensation that should have gone to consumers and 80% of complaints to the FOS in 2014-15 were made via such companies.
The Committee therefore expressed its view that more should be done by HM Treasury and the Ministry of Justice to curb the practise. The government has responded that work is underway to toughen the regulatory regime by: introducing a cap on the amount such companies can charge consumers; transferring regulatory responsibility to the FCA; and better highlighting on the FCA, FOS and FSCS websites that claims management companies are not necessary for consumers to pursue complaints.
The FOS also received some criticism for the large backlog of PPI claims identified by the NAO, with many consumers having to wait more than 2 years for a decision. The Committee felt that while the FOS had told the NAO that it aims to clear the backlog of older cases by July 2017, the Committee felt that the FOS did not give a “convincing account” for the delay and called upon it to publish a clear timetable and report publicly on its progress.
The Committee felt that the FCA has not done enough to ensure that consumers understand the financial products they are buying and the possibility of claiming compensation. It calls upon the FCA to consider what more it will do in this area and report back to the Committee in summer 2017. The FCA and the government accepted the Committee’s recommendation, with the FCA noting that advice is a priority in its 2016-17 Business Plan.
Similarly, the Committee wants to see more done by HM Treasury and the FCA to monitor the extent of mis-selling, and assess regularly how effective their actions are in reducing it.
However the government and the FCA did not accept this conclusion, stating that it is not possible to develop ‘real time’ indicators of the extent of mis-selling.
The message therefore appears to be that while financial institutions should be doing everything they can to avoid instances of mis-selling, the regulators cannot simply rest on their laurels; they should expect to have their handling of such situations closely scrutinised. It will be interesting to see whether any improvements are noted when the various bodies report back to the Committee in late 2017.