The Tsunami is coming

Posted: 28th October 2015

Over recent weeks there have been a number of discrete but related developments affecting the PPI market, all of which raise significant issues for firms to consider. Individually and collectively, they will impact firms’ approach to legacy issues and their ongoing engagement with customers.

The three items are; the FCA announcement to consult on the introduction of a time bar for PPI complaints; the consultation on Plevin and whether commission of over 50% represents the point at which a sale becomes unfair, and the Government and Ministry of Justice’s review of Claims Management Companies. 

Bringing the issues to light

For the purpose of this article, I won’t repeat at length the extensive consultation, however to ensure a common understanding for readers, I have brutally summarised three key developments below:

1. Time bar – the FCA plans to introduce a 2 year time bar, ensuring an end to the PPI scandal in Spring 2018. To ensure customers who haven’t complained to date are given ample opportunity, the FCA proposes to undertake a communications campaign designed to prompt consumers to complain in advance of the final deadline.
2. The FCA also updated us on its plans, following the Plevin decision, to introduce rules where it concludes that an unfair relationship exists under s140 of the Consumer Credit Act.  As the rules stand, firms are required to pay redress of the difference between the commission the customer paid (typically 50-80% for PPI) and 50% of the premium paid
3. New rules introduced to crack down on the rogue claims management companies (CMC), particularly those responsible for bombarding the public with misleading advertising and flooding firms with unsubstantiated claims for compensation

Plevin is also particularly interesting and the main discussion for this blog.  For regulatory folk like myself, I’m keen to understand what the lessons from Plevin are and how can firms best position themselves to prevent future allegations?

The first thing to note is that to think Plevin only concerns PPI would be wrong. Clearly Plevin involved the sale of a PPI contract but the main discussion in the judgement relates to the relationship between a creditor and a debtor, or in more familiar terms, between a customer and a firm. Mrs Plevin’s argument was that if she had known that 71.8% of the premium was to be paid in commission, she would certainly have questioned this. For the product in question, this non-disclosure of the actual commission is not a regulatory breach. Firms operating in the insurance and credit market operate to a lesser standard than those firms selling investments. It may appear odd that the FCA handbook doesn’t require full disclosure of commission in all circumstances, but that is the reality, principally based on the old saying that ‘insurance is bought, investments are sold’.

Notwithstanding this distinction, in their consultation the FCA asks whether commission over 50% should be disclosed. I can understand why the FCA opted for a middle of the road position to stifle debate, but in my view they addressed the wrong question. The Plevin case discussed at length the knowledge imbalance between a customer and a firm and whether considering the broader test of fairness, this gives rise to a potential unfair relationship? Does disclosure of commission over 50% render a sale fair?

The crux of the matter for firms

All of this has the potential to impact a firm’s complaint volumes, and firms should be undertaking scenario planning and stress testing. One such scenario, and perhaps the one that would create a perfect storm for firms, would be the impact of an FCA awareness campaign commencing in Spring 2016, together with the introduction of a cap on CMC’s fees in Summer 2016. This could significantly increase complaint volumes in Spring and Summer 2016 to those outside of BAU tolerances.

There are some interesting questions for firms in light of these regulatory developments. The FCA have said that there is no read across from Plevin into other products, however there must some read across, if only from a debate perspective? What is your approach to disclosure of commission? How transparent is this to customers? What’s the impact on your agents or other parties acting on your behalf? Do you have a common standard or does your approach differ across products?

The consultation period is open, and I look forward to the ongoing debate.