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PPI complaints and consumer confidence

speech by Tony Boorman, principal ombudsman, at the BBA's seminar on payment protection insurance

London, 24 February 2009

My remarks this morning will bring you up-to-speed with how we at the Financial Ombudsman Service are dealing with the thousands of complaints we are receiving about the sale of payment protection insurance (PPI).

And I also want to set out some observations about the implications that this latest in a series of industry mis-selling sagas has for policy-makers - and how consumer confidence can be enhanced.

the ombudsman and PPI complaints

First some numbers. Since September 2007, we have been receiving more than 500 complaints every week about PPI sales issues. More than one in five of all complaints referred to us over the past 18 months have been about PPI. And this shows no sign of slowing down. Indeed, many are forecasting that volumes will increase.

This can come as no surprise. The widespread concerns about the way that PPI policies have been sold by lenders has been well documented - and the evidence is clear from the regulators' published reports and enforcement actions.

It is clear that many firms have had sales processes designed to maximise profitable sales and commission - rather than to focus on meeting the real needs of the customer. The Competition Commission has calculated that consumers have been overcharged by £1.4 billion a year. It seems that a complex product has been pilled high and sold expensive.

Action by regulators should hopefully mean that future sales will avoid the abuses of the past. But complaints raise questions about how any past consumer detriment should best be addressed. It is clear that this is a substantial and as yet unresolved issue.

In our work investigating and resolving the individual complaints that consumers have referred to us, we have made awards against the seller of the insurance - typically a bank or other lender - in more than 80% of cases. This is an uphold rate far greater than in previous large-scale complaint areas, such as mortgage endowments.

This was, of course, the background to our referral of this question last July to the regulator for action under the "wider implications" process.

But the concepts upon which these PPI complaints need to be assessed are not novel or especially complex. Our assessments are set against the relevant requirements of the time. In the words of today's regulatory principles:

... A firm must pay due regard to the interests of its customers and treat them fairly.

... A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

... A firm must take reasonable care to ensure the suitability of its advice.

The principles here build on the self-regulatory codes of earlier regimes and, of course, on the law. And it isn't new to apply these principles to sales disputes either in financial services generally - or in insurance disputes in particular. As we noted back in 2001, when we discussed concerns about PPI sales in an early issue of ombudsman news:

The Code of the Association of British Insurers (ABI) requires the seller to "ensure as far as possible that the policy proposed is suitable to the needs and resources of the prospective policyholder". But many of the complaints we receive indicate this has not happened.

That was true in 2001 – and it is still true today. So firms should need no fresh insights or new guidance, to ensure that they can resolve PPI complaints fairly.

Instead, firms just need to follow the basic requirements of the complaints-handling rules. In particular, firms need to have carried out some fundamental "root-cause analysis" about these complaints – and to have acted on that, to ensure the customers with complaints are treated fairly.

Of course, any such "root-cause analysis" might also highlight wider concerns about the sales practices of the day. In some cases, whole tracts of sales can be shown to be seriously in doubt. We have seen evidence of this, uncovered in recent regulatory enforcement actions. And it is also clear from the work we have carried out ourselves on batches of PPI complaints.

The evidence available to us suggests that many firms have simply not considered the issue by looking at the wider concerns. Instead, they reject individual complaints by saying there is no evidence to support the customer's recollections. They conveniently ignore the evidence under their own noses – of their sales practices at the time and the fact that they are losing the large majority of the complaints considered by the ombudsman service.

standards of complaint handling

I do, of course, recognise that firms' complaints-handling systems may be subject to considerable stresses and strains in the present climate. Complaints about PPI are just one significant part of a wider picture of complaints to firms about charges, account administration, debt and financial hardship. I know most firms expect the position to deteriorate – with yet more complaints expected next year. That is something, as you know, that we are planning for as well.

But at present, we see graphic evidence of the fragility of the complaints-handling arrangements currently in place at some firms. Across our work, we have seen uphold rates increase in favour of consumers. This financial year we will, for the first time, uphold in favour of the consumer over half of all the disputes we resolve.

And increasingly, we are having to take on cases where the firm has dealt with the complaint in a clearly inadequate way – or has not addressed the complaint at all. It is not in the interests of firms or consumers for matters to be referred to the ombudsman simply because inadequate resources have been allocated by firms to the task.

The picture here is by no means uniform across the financial services sector. The range of outcomes varies significantly between firms – as will become apparent for all to see when we publish more information on the outcome of complaints later this year.

I hope firms will be looking carefully at their complaints-handling resources, to ensure that it has both the scale and quality necessary to address the challenges ahead.

implications for policy

So what implications does all this have for policy-makers?

First, relying on consumers to bring individual complaints is at best an imperfect tool for handling such widespread failings. We have seen this before in relation to mortgage endowments and bank charges. We are seeing it again now in relation to PPI. These drawn-out complaint-driven responses to large-scale problems can become long-lasting scars – damaging confidence and souring relationships.

We also know that relying on consumers to bring individual complaints does not work well in practice. This approach will normally work only in relation to a small proportion of the customers who may have suffered detriment. Consumers who are unaware of their rights – or who lack confidence to take on major financial firms – will miss out. And it is often those consumers who have suffered most from past mis-selling.

We have also seen that many firms have well-developed methods of discouraging customers from raising or pursuing complaints. In July 2007 the FSA wrote to firms in the context of bank-charge disputes to highlight "significant deficiencies" in complaints-handling approaches. In particular, the FSA noted:

... a failure to respond to these complaints fairly and consistently; adequately to address the subject matter of complaints; or to ensure complaints are resolved at the earliest possible opportunity. Some firms' complaint handling processes are so protracted, incremental and iterative that they do not appear to comply with our rules.

The FSA also identified:

... false or misleading statements made to complainants. Some firms appear to have been making false or misleading statements to prospective or actual complainants, including representing that no refund or goodwill payment will be made when they are in fact making payments to other customers with identical complaints.

In our experience, these practices were not just restricted to bank-charge disputes. And we see some signs of them again today.

Claims-management companies have made the most of the opportunities here. Their activities are focused on those few areas, like PPI, that can give rise to large volumes of potentially well-founded complaints, given the scale and nature of past sales.

Claims-management companies thrive by reinforcing uncertainty in customers' minds. They rely on knocking customer confidence in financial services – not building it. This means the actions of claims-management companies only add to the sense that consumers cannot have confidence in the way in which financial firms handle complaints.

Consumers have little to go on, to be able to assess the claims and blandishments of the claims-management industry. But if there has been consumer detriment through mis-selling, the net result is that a significant proportion of the compensation due to the consumer is siphoned off to the claims-management company. We have seen in other sectors the wider damage that can occur, when claims-management companies take steps designed to generate additional fees, rather than to deliver deserved redress.

From a wider public-policy perspective, it seems to me that this matter requires further attention. Neither the financial services industry nor consumers can benefit from a situation, where a less than reputable financial firm can cynically conclude that poor practice on its part will be unlikely to generate much in the way of individual complaints and associated compensation.

Similarly, neither the financial services industry nor consumers are well served, if the door is opened to claims-management companies – where the primary incentive is to generate fees rather than redress for genuine loss.

We all want to see wider public confidence in financial services. Confidence that problems will be avoided where possible, and resolved promptly and fairly if they do occur. Present arrangements appear to leave a gap that is being filled in a way that saps confidence, rather than builds it.

So the challenge is to fashion a better mechanism for delivering redress, in cases where widespread consumer detriment has been identified – without simply building opportunities for those who want to knock confidence in financial services, and without adding unnecessary costs.

The FSA set out its current approach to large-scale redress late last year. More generally, there is already thinking underway on these issues by the European Commission and here in the UK by the Civil Justice Council.

The potential need for broader-based action in relation to consumer redress is by no means restricted to financial services. But it seems to me that financial services might be a good place to start.

There is certainly a widespread perception that the financial services sector has had more than its fair share of problems - of which PPI mis-selling is but the latest. And building confidence in financial services remains a critical task for all of us.

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