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by GK Strategy 4th May, 2016
3 min read

Mis-Selling: Will the FCA Up Its Game?

In 2013, financial services mis-selling was defined by the (former) Financial Services Authority (FSA) as ‘a failure to deliver fair outcomes for consumers’. The last few decades have been witness to several high-profile examples of mis-selling; some may remember the Coalition Government’s attempt to clean up the mess that was Equitable Life, a long-winded saga tracing back to the 1980s when thousands of unprofitable policies had been sold to life insurance purchasers. After the House of Lords ruled that these policies must be honoured, the insurer closed to new business, failing to pay what was due to its policyholders. To this day, victims of the Equitable Life catastrophe are campaigning to receive full (or fuller) compensation for the sums lost to the collapse.

More prominent in today’s landscape than Equitable Life, however, is the infamous Payment Protection Insurance, or PPI as it is ubiquitously known. We are all familiar, of course, with the friendly voice at the end of the line on an unknown number attempting to convince us that we might be eligible to claim compensation for mis-sold PPI. Millions of purchasers have been mis-sold PPI, finding that they are unable to actually claim the insurance for reasons such as being self-employed or retired. As a result, £22.2bn was paid out by firms in compensation to over 12 million customers between 2011 and 2015.

So what is the Financial Conduct Authority (FCA) – the regulatory body under whose remit mis-selling falls – doing about this? Is the FCA concerned that 59% of customer complaints to financial services firms related to mis-selling in 2014, compared to the much smaller proportion of 25% in 2010? It would appear that increased fines and redress payments have reduced incentives for firms to mis-sell products, and the FCA has looked at the culture and behaviour within firms, introducing restrictions on bonus structures so that mis-selling is not encouraged or rewarded.

But in a report recently published by the National Audit Office (NAO), the FCA came under fire for lacking ‘good evidence on whether its actions are reducing overall levels of mis-selling’. This is because its strategy for mis-selling is still in development and ‘does not yet systematically draw together aims and success criteria for related interventions, evaluate how they fit together, or link the outcomes of interventions to their costs’. Indeed, on the point of costs, the NAO concluded that the costs of regulatory responses and redress arrangements are substantial, and that the FCA has in part failed to understand how the costs of its activities could hamper its decision making.

It should be noted that despite this, the NAO report does recognise a number of positive FCA measures and initiatives. As mentioned, the FCA’s interventions on fine increases and bonus structures have had a degree of success in deterring mis-selling, and its promotion of changes to governance and internal controls, as well as its campaigns to help purchasers avoid buying unsuitable products, have also been identified as positive steps. The NAO has applauded the FCA for taking a more active approach to mis-selling than its predecessor, the FSA.

So, does a tighter regulatory regime loom on the horizon for consumer facing financial services? Among the NAO’s recommendations were proposals for the FCA to develop its approach to tackling mis-selling, so that the aims and success criteria of regulatory actions are routinely defined and evaluated, and that the FCA analyse alternative approaches to deciding whether products are mis-sold. But the recent appointment of the FCA’s new chief executive Andrew Bailey, a development steered by the Treasury’s hand, indicates an FCA destined at least in the foreseeable future for a more passive role. Bailey is expected to adopt a more moderate approach to financial services regulation and to take something of a step back from the FCA’s current business plan.

As large-scale scandals such as PPI are relatively rare but often very much in the public eye, the pressure for the FCA to demonstrate its effective prevention and handling of such situations may continue to mount as mis-selling complaints continue to rise for other financial products. The outcome of the tension between this possible trajectory and the FCA’s new less activist position is difficult to predict; how will it affect the future reform of the Retail Distribution Review (RDR), the new set of rules around transparency and fairness in the investment industry, enforced in 2013? Will it have an impact on how the Mortgage Credit Directive (MCD) is implemented, the EU framework of conduct rules for mortgage firms?

We have seen evidence of the impetus to introduce measures to further protect consumers in the Government- and FCA-commissioned Financial Advice Market Review (FAMR), but to what extent will its recommendations be carried forward, and what impact will they really have on the consumer? As is ever the case, the world of financial services should  be prepared for regulatory twists and turns that could be coming down the track, but the delicate balance between consumer expectation and the Treasury’s downplay of the FCA may create a more incalculable than usual regulatory environment.

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