The end of an era: closing down PPI complaintsThe final hurdle?

er eThe UK financial services industry has been tackling the consequences of payment protection insurance (PPI) mis-selling and associated regulatory scrutiny for over five years. With provisions currently topping £26b and a Supreme Court ruling bringing further uncertainty to the scale of the PPI issue, the Financial Conduct Authority (FCA) issued a Consultation Paper (CP 15/39) in November 2015 which proposes an approach to bring an end to the PPI saga. This paper summarises the FCA’s technical proposals and sets out EY’s view on the impact for firms.

The FCA proposes to introduce a two-year deadline, supported by a communications campaign, beyond which firms will no longer need to deal with consumer complaints about PPI sales that took place on or before the date of the new rules. The FCA has also proposed an approach for firms to respond to PPI complaints following the Supreme Court ruling in the case of Plevin (Plevin vs. Paragon Personal Finance Limited1).

As firms must respond to the FCA’s CP by 26 February 2016, there is limited time to request clarification on areas of ambiguity or to set out practical implications that may influence FCA final rules. Doing so is key if this is to be the final hurdle to bring an end to the PPI saga.

1Plevin (Respondent) v Paragon Personal Finance Limited (Appellant) [2014] UKSC 61 .

1 The end of an era: closing down PPI complaints The final hurdle?

2The end of an era: closing down PPI complaints The final hurdle?

B ack grou nd to S u preme C ou rt ru ling

The FCA has issued its CP a year after the Supreme Court ruled in favor of the claimant in the case of Plevin deeming that the non-disclosure of high levels of commission in this case (circa.72%) made the contract unfair, based on the court’s interpretation of Section 140A of the Consumer Credit Act 1974 (CCA). Disclosure by insurance intermediaries to retail consumers of commission received is not required to be made under the Insurance Conduct of Business Sourcebook (ICOBS). Despite not being mandated within ICOBS, the Plevin case is one of several legal rulings that the FCA must now consider as part of its supervisory duties.

O v erv iew of the F C A ’ s proposalsThe FCA is proposing to introduce a two-year deadline beyond which firms will not be required to handle consumer complaints about PPI sales that took place on or before the start of the new rules in line with current complaint handling requirements, which ultimately allow consumers to refer complaints to the Financial Ombudsman Service (FOS) if they are dissatisfied with firm’s response. In support of the deadline, the FCA proposes to launch a communications campaign to inform consumers of the deadline and to provide additional information about making a complaint.

In response to the Plevin ruling, the FCA has proposed new rules and guidance on the handling of PPI complaints (the step 2 parallel process). The expectation is that rules and guidance will reduce uncertainty, and promote a consistent approach to the way firms handle PPI complaints. The proposed rules and guidance will also make intervention easier for the FCA (and the risk of intervention clearer for firms).

S cope of the F C A ’ s proposals

eadl ne he na ure e and n la n ► The proposals would introduce a deadline for consumers to

complain to a firm about their PPI. Consumers complaining after this time will lose their right to have their complaint assessed by the firm or by the FOS, although the FOS may choose to review a complaint after the deadline in exceptional circumstances.

► The proposals differ from the three-year time limit under the FCA’s existing complaint handling rules, which runs from the date the consumer became aware or reasonably ought

to have become aware (or reasonably ought to have become aware), that they had potential grounds to complain, the proposed deadline would apply regardless of the consumer’s understanding.

► The deadline would apply to all PPI policyholders, regardless of the type of policy they hold or how it was sold. The deadline would apply to new complaints about mis-selling issues; non-sales related complaints are not caught by the deadline.

► The proposed deadline is not intended to extend time already provided to consumers as part of firms’ previous mailings. Similarly, consumers will still have six months to refer complaints to the FOS if they are dissatisfied with the firm’s response.

le n ► Produ cts: consumers can raise a complaint against a creditor

for non-disclosure of commission for all PPI on products covered under Section.140(A) of the CCA (unfair relationship provisions). This includes secured and unsecured loans, credit cards, and some unregulated mortgages, but excludes regulated mortgage contracts and regulated home purchase plans (where these are not regulated under the CCA).

► C C A j u risdiction: to fall within the scope of the unfair relationship provisions, sums owed by the consumer must have been payable (or capable of being payable) under the underlying credit agreement (which the PPI covered or covers) made on or after 6 April 2007 (and all existing agreements continuing beyond 6 April 2008).

► F irms’ operating models: the new rules cover all PPI complaints that relate to a lender regardless of premium structure (i.e., single or regular premium), nature (i.e., advised or non-advised), claims (i.e., successful insurance claim on policy), whether the premium was financed by the credit agreement it covered, and the nature and relationships of the respective businesses behind the sale of PPI. Consumers can complain to both the seller and, where different, the lender.

► C ommission lev els: the FCA has proposed a level of commission of 50% or above to be presumed unfair if undisclosed to the consumer. However, commission below 50% might still need to be reviewed for unfairness in certain circumstances, if for example the complainant was in financial difficulties or can establish that they had a track record of taking a close interest in the commission payable on other purchases.

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F C A ’ s proposed approach

eadl ne and un a n a a n ► The FCA proposes to lead a two-year phased communications

campaign to raise awareness of the deadline (expected to commence in Summer 2016 once rules are made). Prior to issuing CP 15/39, the FCA conducted research, which highlighted key consumer insights, including existing barriers to complaining. The FCA-led communications campaign is intended to address the barriers identified (e.g., providing reliable information to consumers on whether they bought PPI previously), raise awareness of the deadline and prompt consumers who intend to complain to act ahead of the deadline. In addition, it would explain clearly how to make a PPI complaint while signposting consumers to help where they may require it.

► The FCA proposes that firms will issue their own communications supporting the FCA-led campaign. Details will be explored with ‘qualifying’ firms (firms that received PPI complaints in excess of 100,000 between 1 August 2009 and 1 August 2015). The campaign will be designed to reach all UK adults to ensure that all potential PPI consumers have reasonable opportunity to see or hear the key messages. Given the scale of the audience and the communication challenge, the proposed plan would include broadcast and other high-reach channels (TV and outdoor advertising) to raise awareness of the deadline.

► The initial planning proposes four bursts of advertising activity across the two-year period before the deadline and would also include ‘always on’ elements such as an online hub. Additionally, the FCA proposes an evaluation framework with clear key performance indicators to monitor the campaign, in particular its reach, enabling the FCA to adapt and optimise the channels and messages thereby maximising effectiveness throughout the two year period. A new fee related rule is proposed to pay for the communications campaign. The operational impacts of the communications campaign should not be underestimated — firms will need to think through how they will respond to potentially significant increases in customer queries and complaints over the two year deadline period.

andl n le n rela ed la n ► D ecision- mak ing: the FCA has proposed a two-step process in

response to the Plevin ruling:

► Step 1 — mis-selling (existing rules and guidance): required to assess whether the sale of PPI was unsuitable for the consumer in light of information provided to the firm or otherwise held by the firm.

► Step 2 (additional Plevin rules): required to assess whether non-disclosure of commission constituted an unfair relationship.

► The following types of complaints will be eligible for consideration under step 2:

► A new complaint referring to non-disclosure of commission.

► A new complaint which does not refer to nondisclosure however the firm uncovers evidence of failure to disclose the level of commission.

► A resubmitted complaint which was previously rejected under step 1 because PPI was not mis-sold or it was upheld but the consumer was only paid partial or alternative redress.

► Any complaints submitted that cannot be assessed at step 1 because the firm did not sell PPI.

► Complaint handling principles are unchanged for step 2; in forming their assessment, firms should consider all information available, seek to establish the true substance of the complaint, consider whether they require further information from the complainant, consider new information as it is uncovered and take into account wider issues identified through root cause analysis to assess individual complaints. The CP indicates there is no expectation that non complainants should be contacted.

► Where PPI was sold by a firm that was not the credit provider or lender, the PPI seller will focus on the PPI mis-selling (step 1) and the lender will focus on the commission element, Plevin (step 2).

► Definition of commission: for the purposes of PPI redress only, the FCA proposes to define commission as “ … the proportion of the total amount paid in respect of a payment protection contract that was not due to be passed to and

4The end of an era: closing down PPI complaints The final hurdle?

retained by the insurer … ” The definition focuses on the share of the premium that was not due to go to and remain with the insurer regardless of the nature of the business arrangements between the parties, or the insurer’s internal allocation of revenues (i.e., between selling, lending and underwriting functions). It is also intended to be wide enough to include the aspects of contractual arrangements between lender and insurer, where the proportion of commission is not fixed but increases the longer the policy remains in force.

► C alcu lating redress: where the complaint is upheld under step 2, the FCA proposes calculating redress as the sum of the following:

► The difference between the commission the consumer paid and 50% (e.g., 72% commission in the case of Plevin would suggest a figure of 22%).

► The historic interest the consumer paid on that portion of the premium (i.e., the interest paid on the 22%).

► Simple interest on the whole amount.

► Redress calculations do not need to consider whether the disclosure of commission would have influenced the sale.

Next steps and impact on firms

The impact of changes that will arise from the FCA’s proposed requirements to incorporate Plevin, together with the additional provisions to establish the two-year time limit will require firms to update their policies, processes and systems which will further complicate the considerable challenges facing PPI complaint handling operations.

Set out below are a number of challenges firms should be working through now if they are to be ready to comply. Firms should be planning towards a Summer 2016 date so they are ready when the new rules come into effect. Readiness, including testing of all new processes will be a significant challenge.

► Impact analy sis: sizing the issue is a critical first step that will need to include:

► An estimation of increased complaint volumes that will result from the FCA communications campaign and deadline. Firms may wish to undertake their own consumer testing to supplement planning scenarios (see ‘Provisioning’).

► Early consideration of policy decisions required: this will help firms plan for operational changes, for example in relation to data requirements and redress calculators, needed to meet the requirements. Implementing a clear plan and roadmap of activity will be critical to firms’ ability to meet the requirements within expected time frames for compliance.

► Consideration of how firms should respond to the CP by 26 February 2016 deadline, and whether early discussions are required with additional stakeholders, for example the FOS as well as whether further clarification is required from the FCA before it finalises its approach.

► C ommu nications campaign: the FCA’s plans for its communication strategy are not yet clear; firms will need to better understand the proposals, the support required by them and the potential consequences. For example, whether they will be required to provide data to the FCA or to conduct targeted consumer mailing as part of their own communications campaign (both would present major data challenges), as well as how they would need to interact with third parties coordinating the online hub if at all, or to update their own communications (including through letters, contact centres and web-based communications). The messages communicated through any campaign will need to be carefully balanced as outcomes will be different for firms with different consumer and product portfolios. Firms should take the opportunity to engage with the FCA at an early stage.

► S ou rcing records: firms will need to source records to evidence the level of commission paid to insurers for PPI transactions in some cases dating back to the 1990s. An obvious challenge for firms will be whether they have access to such records and, if not, how commission levels will be determined in accordance with the definition proposed by the FCA. Where records of commission charges in full or in part are lacking, appropriate assumptions, tools and processes will need to be consistently applied to plug data gaps to estimate commission levels.

► Irrespective of the approach adopted, firms should expect a high degree of scrutiny from consumer representatives, the FCA, FOS, claims management companies (CMCs) and auditors. It will be important for firms to be able to demonstrate early that they are on top of the new requirements. Firms should begin the process of gathering available information now.

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► Proactiv e rev iews: many firms are already working with the FCA using proactive approaches to identify and contact non complaining PPI customers where root cause analysis indicates breaches may have occurred. For some, consumer complaints made as a result of existing proactive reviews will need to run alongside those impacted by the FCA’s proposals; as will continuing work to refine and strengthen PPI complaint handling processes. Firms will need to develop strategies to identify consumers who are included in proactive contact mailing lists, ensure the correct decisioning and redress policies are applied and check that the application of the deadline is aligned to the consumers’ eligibility to complain.

► People and training: demand for complaint handlers will increase in 2016 leading to renewed pressure to recruit and train staff. Firms’ preparations should take into account location strategies, training and accreditation requirements once policy has been set and systems, controls and processes have been developed. Skills requirements will differ depending on the level of automation firms are able to bring to their processes. However careful monitoring, including the need for increased levels of quality control and assurance, is likely to be required.

► S y stems, processes and data: to ensure that complainants are treated fairly, firms will need to have robust management information and processes in place which identify past complainants with both the rationale for their initial complaint and the outcome to assess the eligibility of consumers to present new complaints. Firms should already be maintaining robust records of existing Plevin-related complaints which may need to be revisited once FCA rules are made, and will need to ensure their ‘no PPI’ records are robust.

► R edress policy : on the face of it would appear relatively straightforward, but firms will need to ensure, for Plevin- related PPI complaints relating to live single-premium polices, that future payment and loan restructuring is set up as if complainants were paying only the level of commission deemed to create a fair relationship between debtor and creditor. Cancelled policies will require yet a different treatment and credit card complainants will need to be given the option to discontinue with their policy once commission is disclosed.

► Where the lender and seller are different parties, firms will need to decide how to split the proportion of redress due if failings are apparent for both mis-selling and commission elements of the sale, and then establish robust methodologies. Decisioning processes, evidence templates, consumer letters and contact strategies — together with quality control arrangements and systems — will need to be updated and tested to accommodate the proposed requirements.

O ther factors

The FCA acknowledges that new legal rulings may require additional rules to be made and has asked for comments on their proposals in light of this. We note the FCA proposes that redress for non-disclosure of commission should equate to the difference between 50% and the amount of commission greater than 50% (plus interest), whereas in the case of Plevin, the total amount of commission was paid as redress. The FCA’s CP also references the McWilliam vs. Norton2 case which concerned the non-disclosure of commission received by a credit broker, not currently subject to the FCA’s proposed PPI complaint handling or Plevin requirements. Additionally, CP 15/39 notes that although it will propose a two-year deadline for complaints, there is nothing to prevent consumers and CMCs taking their claim through the courts, (subject to the grounds for the claim being made within the six-year limitation period).

Prov isioning

The FCA-led communications strategy will drive an increase in the level of complaints from new complainants raising mis-selling issues as well as complainants who wish to complain about commission disclosure. Provisioning estimates should include consideration of the number of consumers who have not already complained and the likely number who may now complain, the likely uphold rates for those cohorts of consumers and the likely level of redress. Firms may wish to undertake their own research to inform provisioning scenarios.

2McWilliam v Norton Finance (UK) Ltd (in liquidation) [2015] EWCA Civ 186.

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H ow E Y can helpEY has extensive experience in helping firms address the PPI challenge. Our core team has been close to the issues for many years and has worked with many of the leading industry participants on their PPI programmes.

Our range of services extends from Advisory to operational support and includes:

► R egu latory adv ice: Undertaking detailed analyses of the effect of regulatory measures, such as the impact of the deadline, and including the operational consequences of new rules and guidance.

► F inancial accou nting: Combined with our regulatory professionals, our audit team can input to the challenge process for setting provisions.

► Programme implementation and deliv ery : EY is able to offload the burden on management’s resources through the design, implementation and delivery of large-scale PPI programmes, including decisioning and Plevin re-dress calculations.

► L egal team: EY’s legal services team can support with the interpretation of the CCA and wider legal implications of the FCA’s proposals.

► Independent q u ality assu rance: Our team of professionals has extensive experience of providing independent quality reviews for PPI programmes.

For Plevin-related provisioning, firms will need to consider the number of policies that fall within the CCA jurisdiction including consideration of how open-ended credit agreements or refinanced loans may be captured, the number of policies that have commission rates greater than 50% and the number for which full redress has already been paid under the FCA’s existing requirements.

Early analysis will support firms to manage their internal processes, investors and other external stakeholders, for example the Prudential Regulatory Authority, who will need to understand the rationale for provisioning, and require robust evidence, as part of its Internal Capital Adequacy Assessment Process (ICAAP) for conduct risk.

S u mmary

The FCA has made a clear stand toward closing down the PPI story and toward addressing head on the implications of the Supreme Court ruling on Plevin. Closing down the review of PPI complaint handling will be a significant step. We expect extensive public scrutiny over the way in which firms handle their compliance with the proposed requirements over the next two years. The FCA has not set a date for finalizing its rules, but the current expectation is rules will be made by Summer 2016. Implementing requirements will be a complicated task, but we believe the way firms prepare and the level of active compliance demonstrated over the next two years provides an opportunity for the financial services industry to draw a line under previous behaviors and to consign to history, one of its biggest ever conduct risk-related scandals.

J ohn L iv er ar ner nan al er e rn un

Tel: + 44 20 7951 0843 Email: jliver1@uk.ey.com

Peter W allace ar ner an n a al ar e ud rn un

Tel: + 44 20 7951 3247 Email: pwallace2@uk.ey.com

M atthew K ellett ar ner e al rn un

Tel: + 44 20 7951 8095 Email: mkellett@uk.ey.com

S aj edah K arim re r nan al er e rn un

Tel: + 44 20 7951 5755 Email: skarim1@uk.ey.com

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