RiskTech Forum

Wolters Kluwer: The Neverending Story - Will Mis-Selling Scandals Always Be With Us?

Posted: 1 December 2016  |  Author: Sue Berwick  |  Source: Wolters Kluwer

The Financial Conduct Authority’s (FCA’s) monthly figures on payment protection insurance (PPI) refunds and compensation were updated on 4 November 2016 to show that, since January 2011, firms have paid a total of £25.3 billion to customers who complained about the way they were sold this product. That’s a staggering amount of money – more than enough to buy everyone on the planet the largest size of Starbucks cappuccino (think of the tax implications!).

It feels like UK PPI issues have been around forever. Problems with mortgage PPI (MPPI) were first identified as early as 1995 and difficulties with PPI linked to credit cards and loans became apparent in 2003. We’ve been promised that we’re near the end of the PPI tribulations for the past few years, but as soon as the regulator or Ombudsman says this another avalanche of claims are unleashed, which again extends the timeframe. This time, however, we must really be near the end as the FCA is determined to introduce a rule which will set a two-year deadline (publicised by a communication campaign) for consumers to make a PPI complaint about sales that took place on or before the date of the new rules. If all goes to plan the rule putting in place the deadline should be made by the end of December 2016 and would come into effect by the end of June 2017. The actual deadline would fall two years after the rule comes into force, so by the end of June 2019. That still leaves a fair amount of time for all those who haven’t yet claimed to get their claims in, so things may get worse before they get better.

It’s no coincidence that the period in which PPI mis-selling claims have become their own lucrative industry is the same period in which more of the UK population has access to the internet. The Office for National Statistics tells us that in 2016 the internet was used daily or almost daily by 82% of adults in Great Britain, compared with 35% in 2006 when directly comparable records began. Going back further would see an even smaller proportion or web users. It’s difficult to image such an immense volume of PPI claims without the internet as it’s been the major communication tool letting customers know they can claim. Consumer champion sites such as moneysavingexpert.com have played an enormous part in encouraging consumers to claim for PPI mis-selling without resorting to the use of claims management companies (CMCs). Increased use of social media has also been significant in publicising the issue.

Many people ended up with PPI cover than was useless to them as they didn’t understand the product and what it could (and couldn’t) do. But it also seems that many who are complaining about mis-selling don’t really understand exactly what they’re doing and are just “having a go” using pro-forma letters and instructions available on consumer websites. There’s an obvious irony here and it’s not one which will be resolved any time soon. Consumer understanding of financial products is notoriously poor and doesn’t look set to improve in the near future. At the same time many consumers still see financial services firms as faceless and “fair game” for a perhaps shaky claim.

If there’s evidence of consumers jumping on the PPI claims bandwagon, the same can certainly be said for CMCs. Figures published by the National Audit Office in July 2016 estimated that between April 2011 and November 2015 such firms were paid fees of between £3.8 and £5 billion out of the monies paid to UK consumers in respect of PPI complaints. CMCs could be said to be partly to blame for the PPI reclaim wave having gone on so long. It’s also easy to predict that such firms will want to have a big push to find new PPI reclaim customers before the FCA’s deadline, which will push the total reclaimed (and their own cut) up even further.

Though the PPI “scandal” may soon be over (relatively speaking), this doesn’t mean that we’ll see an end to all mis-selling of retail financial products. Indeed anyone who has worked in financial services for any length of time will have lived through previous crises, including those relating to endowment mortgages, pension transfers, and the current favourite, packaged bank accounts, to name but a few.

All big mis-selling situations seem to have very similar roots. Some issues can begin right at the design stage of a new product (or a new variation of an existing product), or even before, as the motivation for the creation of a new product is vital. Is the firm creating the new product in order to give consumers what they need or want, or it is just being seen as an enormous money-spinner for the firm? It’s to be hoped that the latter is rarer than the former, particularly in recent years when successive regulators have become much keener on the fair treatment of customers.

Once the product is designed, it all comes down to the selling of it. All too often the problem has been firms taking a “one size fits all” approach to a particular product. The products at the heart of mis-selling situations have all been good products in theory and useful for particular sectors of the public, but they were never going to be ideal for everyone. Some consumers sold these products were never going to be able to use them as intended, but were sold them regardless. Again this is down to firms being more interested in their profit margins, and also down to individual sales staff with an eye for their commission. In these days of compliance culture and ethics, such blatant mis-selling is much less common but is still possible so firms’ senior management need to be on the lookout for it.

But while it could be said that greed (whether at firm or individual staff member level) is at the root of mis-selling, it could also be argued that greed is sometimes also at the heart of reclaiming during a scandal. Some of those attempting to reclaim premiums and get compensation are aware that they don’t have a case, but try anyway, with some unexpectedly succeeding. This also adds more fuel to the situation and can make an individual product’s reclaim period go on for longer.

Human nature, and firms’ need to make money, being what they are, it doesn’t look like we’ll ever see a complete end to mis-selling issues. There will always be new products, some designed deliberately to “get round” particular regulatory barriers, and those who wish to cash in on them. There will always be third parties (like CMCs) who can benefit from getting involved, and consumers who will have a punt at getting what they see as some “free money”. However, it’s likely that individual scandals may get shorter and be nipped in the bud more quickly by the regulators. For example, problems around the mis-selling of packaged bank accounts appear to have been dealt by the FCA with greater haste than other similar issues were dealt with by its predecessor. One reason for this is that there now seems to be a much better connection between the Financial Ombudsman Service (FOS) and the FCA so that steadily increasing numbers of complaints about a particular product can be monitored and addressed by the regulator. In addition, the FCA’s work on behavioural economics may reap benefits in allowing the regulator, and in turn firms, to understand what motivates consumers and how best to deal with them.

So can we close the book on financial services mis-selling? That might be premature, but even if it does prove to be a never ending story, at least each chapter should be shorter, cheaper, and less scary.