Helping retail consumers achieve a fair deal through the appropriate use of our regulatory tools

Misselling and Redress: the FSA's approach

In recent years there have been several examples of situations that have resulted in losses for larger groups of consumers. These include the misselling of endowments, personal pensions, free-standing additional voluntary contribution pension schemes (FSAVCs) and more recently spilt capital investment trusts and structured capital at risk products (SCARPs)/'precipice bonds'. In these situations we have worked closely with others including the Financial Ombudsman Service (FOS), the Financial Services Compensation Scheme (FSCS) and industry to take action to ensure that consumers are able to get the redress they are entitled to.

It is clearly important that both we and industry take account of the lessons from these events. We have held round table discussions with key industry and consumer representatives on a number of issues including the preventative measures we and industry have in place or are developing and the range of 'tools' we might deploy when a potentially significant misselling event occurs.

Preventative Measures

On the basis that 'prevention is better than cure', we believe that we have in place a very clear and substantive preventive agenda for the future of the retail market. This covers a broad range of initiatives, namely:

  • improving consumers' financial capability through a national partnership, which should in the long term better equip consumers to make informed choices about financial issues;
  • improving the quality of disclosure information for consumers; and
  • strengthening our focus on ensuring firms are giving sufficient priority to the regulatory requirement to treat their customers fairly so that it becomes a key part of our regular monitoring, risk assessment and risk mitigation programmes. The scope of this work also includes firms' financial promotions and their complaints handling.

At the same time we are also developing our intelligence antennae particularly through our financial promotions, retail intelligence and consumer and industry sector teams, to try and ensure early warning of potential future problems. If we see an issue arising, our first step will be to carry out a quick analysis to confirm whether it is a problem that we need to consider. This analysis will not cover all the details but will look at the nature of the problem, the product, the consumers who are affected and the scale of the potential loss. This work will be complemented by the continued development of our Product Risk Framework, a tool designed to help us assess the risks to consumers of different products being launched or marketed by firms. We will use the framework to evaluate in a consistent way the inherent risks to consumers posed by the products a firm sells or manufactures. This should allow us to strengthen our focus on the appropriateness of the controls governing the manufacture and sale of products when we carry out risk assessments of individual firms. It will also help us in our identification and prioritisation of product and related issues affecting a range of firms and consumers, where a thematic approach to mitigating risk might be more appropriate.

These measures, in addition to our role in standard setting, authorisation and supervision of firms, will help us to identify and respond to risks quickly.

However, the lessons of the past are not just for us. It is also in the interests of firms to identify problems when they emerge and to take action to mitigate them rather than wait for potentially costly remedial programmes. The sizeable sums which firms continue to pay to consumers by way of redress and the steady flow of disciplinary cases arising from misselling demonstrate that many firms have still not given sufficient priority to the regulatory requirement to treat their customers fairly and it is essential that this changes.

How does the FSA deal with episodes of mis-selling?

When a potentially significant problem arises, one of the early decisions we have to make is which tools to address it with. Our approach is based on (i) the need to develop an efficient and effective package of measures that take into account the likely costs and benefits; and (ii) our past experience of redress programme management.

We can use a variety of tools to address an episode of mis-selling. These include customer-oriented and industry-wide activities as well as tools which are more firm specific. The consumer-oriented and industry-wide tools range from consumer education, and improving the training and competence of firms, through to sector-wide projects or a full-scale review by both us and industry of the mis-selling episode (Section 404 review under FSMA). Previous firm-specific tools we have used include desk-based reviews and on-site visits as well as disciplinary action and restitution.

Achieving redress is rarely cost free and often involves significant administrative costs which, in some circumstances, can be large in relation to the potential compensation concerned. Ultimately many of these costs will be borne by consumers. Therefore, when deciding which tools are the most appropriate for addressing particular episodes of misselling to ensure that consumers receive appropriate redress we take a number of factors into consideration:

  • The scale of the problem
    We will attempt to establish how many consumers are involved and the extent to which firms themselves have already taken steps to address emerging problems. For issues involving a small number of firms or a relatively limited number of consumers it is likely to be more practicable to use a combination of supervision or enforcement tools which target those firms directly involved. This was the approach we adopted with the SCARPs/'precipice bonds' episode.

    For problems involving many firms and consumers, more standardised approaches which can be applied across the sector concerned are likely to be more effective and appropriate.

  • Nature of the products/loss involved
    An assessment will be made of the complexity of the product(s) involved. Where they are relatively simple and it is simple for consumers to assess whether they have faced a loss then it is more likely to be practicable for consumers to take action themselves through the complaints procedures.

    In the case of personal pensions misselling it was particularly difficult for the affected consumers to understand the products and work out the extent of their loss. These factors made a collective redress scheme more suitable.

  • How homogenous?
    We will need to consider how homogenous any problem is across the sector concerned. For example, where the issues are relatively common across a single sector then a standard approach – such as some form of industry review or co-ordinated action by the firms involved – is likely to be the most effective tool. Indeed this is the approach that we adopted for the recent split capital investment trusts episode.

  • Average loss per customer
    We have to ensure that any form of redress is cost effective. Although each case will be judged on its own merits, careful consideration will be made before proceeding with an approach that will involve administration costs absorbing more than 30% of the total compensation paid.

    For the pensions review, administrative costs amounted to 17p of every £1 of the compensation paid.

  • Nature of the consumers affected
    We shall also look at the nature of the consumers affected by any episodes of misselling – in particular their financial capability. This factor had an important influence on the decision to proceed with a collective redress scheme in the case of the personal pensions misselling episode as it affected groups of consumers who were unlikely to have been effective complaining on their own.

  • Clarity of the misselling issue
    Although this may not always be clear at the outset we recognise that understanding how and why the problem has arisen could be helpful in deciding how best to achieve redress. At the same time we shall consider the attribution of responsibility for the misselling episode. This may lay, amongst others, with the distributor, the producer, the regulated community more widely, the regulator or indeed the policy/law maker.

  • The wider implications of redress
    This is an important factor to consider as, in some circumstances, large scale redress programmes can have a significant impact upon the financial position of those firms involved and even in some instances upon other groups of consumers. Where such issues do exist we will consider each episode individually.

All of these criteria will be used to help us select an effective and proportionate approach to achieving redress in any future cases of misselling. We will also begin the tool selection process with a clear statement of the objectives we hope to achieve. This would enable interested stakeholders to fully understand the anticipated outcomes and also enable a measurement of how successful our response had been.

Future cases

Going forward we intend to continually monitor the effectiveness of our chosen approach and ensure we report on the progress that has been made. We shall also look to assess at the end of the programme the extent to which we have achieved our objectives. In cases where the nature and extent of misselling is difficult to fully determine at the outset, then we shall also look to adopt a strategy which allows for the range of tools to be varied as new information and issues become evident.