U.K. firms make changes to reduce the risk of mis-selling: report

“Historically, firms and their sales staff had strong financial incentives to sell products such as payment protection insurance (PPI) to their customers, even where the products were unsuitable, and many firms appear to have judged the immediate benefits of mis-selling to be greater than the later potential costs of compensation and fines,” the NAO report says.

However, it appears that calculus has changed in recent years. The report indicates that the industry has paid approximately £22.2 billion (C$43 billion) in compensation to clients for the mis-selling of PPI since 2011. Additionally, the report notes that the FCA has imposed £298 million (C$577 million) in fines for mis-selling activity since April 2013; and another £898 million (C$1.7 billion) in compensation has been paid by that country’s Financial Services Compensation Scheme related to mis-selling by defunct firms, between 2010-2011 and 2014-2015.

Additionally, the NAO report finds that the FCA “has made multiple interventions to affect incentives”, including introducing restrictions on bonus structures; along with the fines it has imposed and the massive cost of PPI redress payments. As a result, the NAO report found that firms have made changes to their incentive structures to reduce the risk of mis-selling.

Yet, the report also concludes that it’s difficult to assess whether the FCA’s efforts are reducing the overall scale of financial services mis-selling to consumers. Privacy rules prevented the NAO from making definitive judgments about the efficacy of the FCA’s approach.

From the information that is available, the NAO found that it’s not clear how well the regulator’s efforts are working. “The FCA’s information on complaints to firms does not yet draw together complaints data and information that could show whether its actions are reducing mis-selling,” the report says. “Gaps in the FCA’s overview of mis-selling create a risk that its interventions may not be well coordinated, and means that the FCA cannot be sure that it has chosen the most cost-effective way of intervening.”

Additionally, the report found that the banks’ handling of complaints from customers has been poor, which has required ongoing action from the FCA and the Financial Ombudsman Service, including the introduction of new rules, and the taking of enforcement action, by the FCA. Despite these actions though, the NAO found “there has been no noticeable fall in the level of complaints about mis-selling upheld by the Ombudsman in the past five years.” It reports that the Ombudsman has upheld complaints from consumers in 62% of cases brought to it since April 2013.

The NAO report also notes that there remains a substantial backlog of complaints, which isn’t expected to be cleared until July 2017. And many consumers who have been mis-sold financial products fail to receive full compensation through the omduservice, the report says, often because their complaints are handled through claims management services that reduce consumer payouts.

“The Ombudsman has found that many consumers don’t pursue a complaint because they believe that it wouldn’t achieve anything, or that it would be too stressful,” the NAO report says. Although the FCA and the Ombudsman have tried to encourage consumers to complain directly, these efforts have had “little apparent impact so far,” the report adds.

“Mis-selling of financial products remains a major problem for Britain’s consumers,” concludes Amyas Morse, head of the NAO, in a statement. “The FCA cannot be confident that its actions are reducing the overall level of mis-selling, and it has further to go to show it is achieving value for money.”

To that end, the report sets out several recommendations for the FCA and the Financial Ombudsman Service for improving in this area, including that the FCA: do more to assess the total costs and benefits of its work; formalize its approach to evaluating redress mechanisms; and work together with the Ombudsman to improve firms’ complaints handling, and to help consumers access redress without using claims management companies.

In response, the FCA issued a statement indicating that it “welcomes the NAO report and accepts its findings.” The report’s recommendations aim to build on the FCA’s current strategy and increase confidence that it is achieving its intended outcomes for consumers, the FCA adds.

“It is unlikely that mis-selling could ever be eliminated completely. Our aim is to avoid and minimise it as far as possible, create the right incentives and culture in firms and to ensure appropriate redress for consumers and regulatory penalties for poor conduct are put in place when it occurs,” the FCA says.