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Mis-selling, Mis-claiming... and Mis-funding

The final deadline for lodging a PPI claim passed on 29 August 2019.  The official current figure for PPI redress paid by firms, mainly big banks, is £36.4 billion.  The final figure will be a lot higher once the last cases in the pipeline complete - this is largely because there was a considerable ‘spike’ in PPI mis-selling complaints in the lead-up to the deadline.   PPI redress dwarfs the reported £1.9 billion paid in the earlier well known mis-selling episode, endowment mortgages.

The regulators fined a number of firms for PPI mis-selling or related conduct and, more generally, the Financial Conduct Authority has proved to be a much stronger enforcer than its predecessor the Financial Services Authority.  

However, senior managers in the big banks escaped individual regulatory accountability for PPI mis-selling.  New City Agenda recently reported that the only senior executive of a major firm fined by the regulators for presiding over the mis-selling of PPI was the chief executive of Land of Leather, a sofa retailer.  This was a £14,000 fine back in 2008, for allowing the firm’s sales team to sell PPI on loans without adequate training or monitoring.  The regulators’ explanation for this surprising situation was that they lacked the tools to apportion individual accountability in financial services firms.

The senior managers and certification regime (SM&CR) has closed this accountability gap.  SM&CR, which is a detailed and potentially very robust regime, obliges financial services firms to assign clear accountability within their organisations.  Combined with much greater focus within firms on culture, compliance and conduct risk, it should reduce further episodes of mis-selling and, if they still happen, ensure that regulators have the power to hold relevant senior managers responsible.

From the consumer perspective, another problem has been the practices of certain claims management firms (CMCs).  Most of us are very familiar with nuisance calls from CMCs asking about accidents we never had or products we never bought.  In addition, relevant regulators have frequently had to warn CMCs against poor due diligence when assessing and submitting claims, which in many instances led to bogus claims – sometimes where the firm in question had never had any dealings with the claimant, let alone sold them the product complained about.

Again, the authorities reacted strongly to poor practice by CMCs, now regulated by the FCA and subject to explicit and robust conduct rules (like financial services firms).

Therefore, with much tougher regulation of financial services firms and of CMCs, we should see a lot less mis-selling and mis-claiming in future.

Unfortunately, just at the point where we can expect significant improvements in these areas, the Financial Ombudsman Service has made proposals that could undermine much of the good work.  Since the early 2000s, the Service has settled individual disputes between consumers and businesses that provide financial services.  Overall, it has done a very good job, especially as the authorities did not design it to deal with massive mis-selling episodes like PPI.

Financial services firms fund the Service through –

  • case fees that each firm pays for each complaint against it that goes to the Service, and
  • a levy on all relevant firms. 

The funding split is currently 85% from case fees and 15% from levies.  This arrangement means firms that generate the largest numbers of complaints provide the majority of the Service’s funds – therefore, it is sometimes described as an example of the ‘polluter pays’ principle. 

Recent proposals from the Service, Our Future Funding, would change things considerably and not for the better.  A key proposal is that the case fee/levy split should change from 85/15 to 50/50. 

We believe that such a change is unnecessary and disproportionate for smaller and medium-sized firms.  Most importantly, it would create a moral hazard by providing a financial shield to future large-scale ‘polluters’ (ie the firms with most complaints and usually most upheld complaints) at the expense of firms that had treated their customers fairly. 

The Service argues that the change would give it greater stability and certainty on its income and help it to manage its resources more effectively.  However, the Service’s large contractor workforce accounts for more than 30% of the Service’s expenditure.  In our view, flexing that workforce (something entirely in line with the Service’s policies) would provide all the flexibility it requires to manage its resources, even during volatile periods.

One of our members made the following point –

“Raising more from the levy and less from the case fees penalises the “good” firms that resolve customer complaints before they go to the ombudsman meaning that the “good” firms subsidise the firms that do not resolve cases before going to ombudsman”.

Another stated that the 50/50 proposal, if implemented, would –

“have significant impact on firms such as the Society that will be inevitably required to pay substantially higher levies, whilst having comparatively low levels of FOS referrals.  Firms such as the Society would in effect be subsidising polluters through paying a higher proportion of FOS’s running costs.”

 

One of the Service’s own funding principles is that any arrangement should “create no perverse behavioural incentives”.  Nevertheless, the result of the new funding structure, if it went ahead, would be that firms generating fewer complaints, whether due to size or behaviour, would heavily subsidise firms that account for the majority of complaints to the Service.  If this is not a perverse behavioural incentive, then we must have misunderstood the term!

In other words, the 50/50 provision would throw a very large spanner (in the form of ‘mis-funding’) into the works just at the point where the regulatory regime appeared to have a handle on mis-selling and mis-claiming.  Both in terms of substance and of timing, this is a highly unwelcome and retrograde proposal.  We expect formal confirmation of whether or not it goes ahead in December.

The FCA has responsibility for confirming the levy it will collect from regulated firms each year, and approving proposals that the Service makes about its case fees.  We urge the FCA to reject the 50/50 proposal.

 

The Service’s consultation is here.

The BSA response is here.

Posted by Chris Lawrenson on 26 September 2019