The PPI misselling scandal has been a costly episode for the financial services sector, both financially and reputationally. With the deadline now passed, Sam Barrett asks: what has the industry learnt?
With the deadline passed on 29 August for UK consumers to make a complaint about a payment protection insurance (PPI) policy, it is time for the financial services and insurance industry to consider what it has learnt. While changes to the regulatory landscape mean the chances of a repeat are slim, there is certainly no room for complacency.
Addressing PPI misselling has been a costly episode. The Financial Conduct Authority (FCA) estimates that as many as 64 million policies were sold before 2010, with many of these missold and eligible for a return of the premium paid plus interest. As a result, at the end of May 2019, a total of £35.7bn had been paid to customers who complained about the way they were sold PPI, or where the provider earned a high level of commission and did not inform the customer.
With about £350m being paid out per month, and a further seven to eight months of payments due, Brian Brown, head of insight (banking and general insurance) at Defaqto, says the final bill will be about £40bn -- a significant increase from the early estimates of £4bn to £5bn when the then regulator, the Financial Services Authority (FSA), first started looking at the problem.
It is not just the financial costs that have hit the industry. Dan Preddy, partner at DAC Beachcroft, says that although the banks have been liable for most the financial costs, it is had implications for the broader industry. "Consumer trust in financial services reduced as a result of PPI misselling," he explains. "It also made people much more aware that they can make a complaint and, if something isn't right, they might even get compensation."
Such a significant cost, both financially and reputationally, invariably leads to changes in behaviour. "Everyone's trying to avoid another misselling scandal, so the industry is on a journey to become more customer-focused," says Mohammad Khan, general insurance leader at PwC. "In the past it was the norm to cross-sell all sorts of additional products, but now these extras are only brought up if the customer asks for them."
This makeover has included an overhaul of staff incentives. Rather than a 'sell more, earn more commission' approach that helped to drive the bad sales practices surrounding PPI, staff are now being incentivised to do the right thing for customers.
These trends have also been driven by the regulator. Laith Khalaf, senior analyst at Hargreaves Lansdown, says financial regulation has changed significantly in the last decade, as a result of the PPI scandal but also the 2008 financial crisis. "There's a much greater degree of regulator scrutiny now," he explains. "It should always have been about the consumer but it's much more explicit now."
While the tougher approach being taken by the regulator and the Ombudsman is positive, not everyone believes it will be sufficient to prevent further misselling issues
This shift in focus is driven in part by a change in the regulator's remit. Mr Brown says that while just one of the FSA's four corporate responsibilities was consumer protection, this is the FCA's primary objective. "It's a different beast, with a bigger stick," he adds, pointing to the regulator's much more interventionist approach. "If it sees something it doesn't like, it's not scared to step in. It's not going to wait for a super-complaint before it takes action."
The FCA's approach is strengthened by the Insurance Distribution Directive, which has a statutory objective to put the customer first, and the Senior Managers and Certification Regime, which encourages greater individual accountability.
Mr Brown also points to the 'Dear CEO' letter that the FCA sent out in April to outline its expectations of general insurance firms. This highlighted the fact that it had identified significant potential for harm and poor outcomes in the general insurance distribution chain; and set out its expectations of firms. "Insurers will need to consider the value that customers receive and have sufficient knowledge of the remuneration of everyone in the distribution chain," he explains. "This is very different to the position with PPI, where responsibility lay with the distributor. This will drive cost out of product lines: it's already attacked the add-on sale of guaranteed asset protection insurance and I suspect other add-ons will come under greater scrutiny."
Also helping to set the tone is the increase in the framework for the Financial Ombudsman. As well as increasing the maximum compensation from £150,000 to £350,000, it is also dealing with two new jurisdictions -- small to medium-sized firms and financial providers; and claims management companies and their customers. Mr Preddy says this will have repercussions for any organisation offering financial advice. "Firms can expect higher professional indemnity premiums as a result of the higher exposure," he says. "It helps to reinforce expectations about how customers should be treated."
ROOM FOR IMPROVEMENT
While the tougher approach being taken by the regulator and the Ombudsman is positive, not everyone believes it will be sufficient to prevent further misselling issues. Nick Baxter, partner at Baxters Business Consultants, says there are still far too many examples of bad practice. "You would have thought the PPI scandal would have been a big wake-up call to become completely customer-focused and get the right governance in place, but we've just seen the FCA fine Standard Life £30m for failing to put adequate controls in place around non-advised sales of annuities. How could this happen?"
Although disheartened by this, Mr Baxter does see some positives in the FCA's response. "The 15,000 customers affected have received redress already," he says. "The FCA has the tools to force redress programmes on people. This is an improvement from when the industry was dealing with PPI misselling."
With the regulator issuing more and more rules and guidelines around how financial services and insurance firms operate, putting customers first can seem like an arduous task. But even though it may squeeze some profit out of a business model, it's an approach that will win in the longer term, with customers valuing and trusting this professionalism.
Thanks to more consumer-focused regulation, another scandal on the scale of PPI misselling may be unlikely. But, with consumers more aware of their rights and an active claims management industry, further claims are inevitable.
Tracking claims management company activity gives an indication of what could potentially be next, says DAC Beachcroft partner Mr Preddy. "Pension transfers, SIPPs and interest-only mortgages are featuring heavily in their advertisements," he explains. "The Ombudsman also reported an 86% increase in SIPP complaints in the 2018/2019 financial year."
Also grabbing attention are stocks-and-shares ISAs, with claims management companies looking for consumers who were not made aware that the value of their investment might fall.
Although these areas need attention, the number of complaints remain small in comparison to PPI, which made up 46% of the 389,000 complaints the Financial Ombudsman dealt with in 2018/2019. Investments and pensions made up just 4%.
Liability insurers can also find themselves dealing with large volumes of claims and many will be watching this space closely after a Californian court ordered Monsanto to pay more than $2bn to a couple who developed cancer after using its weedkiller Roundup.
Occupational diseases can also cause huge spikes in claims. But, while it would be wrong to rule out the possibility of this happening again, PwC general insurance leader Mr Khan says the workplace is a lot safer today. "Thanks to health and safety legislation, there's much more protection for employees now: the risk of another asbestos is very remote," he says. "Forty years ago, people were paid danger money; today that just doesn't need to happen."