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Mis-selling of retail financial products: Are we through the storm? 

Firms paid out a colossal £22.5bn in Payment Protection Insurance claims.  Could it ever happen again? .... 

 If anyone had said 10 years ago that UK firms would pay out billions of pounds in compensation to customers for mis-sold financial products, they would’ve been laughed out of the room.  (Although it has been pointed out to me after my original article was published that many wiser management consultants and bankers of course predicted the outcome - but just weren't listened to or were not sufficiently in a position of power to counteract the arguments of more senior management!) You can be assured that no-one is laughing now - according to the Financial Conduct Authority, firms paid out a colossal £22.5bn in Payment Protection Insurance claims between January 2011 and December 2015.

Whilst its been great business for management consultants, it’s been a nightmare for the sector, battering the reputation of financial services firms and costing billions in compensation, fines and admin to sort out the mess. After six years of bad publicity and astronomical balance sheet provisions could we, at last, be over the worst - or is the more pertinent question perhaps - could it ever happen again?

Recently the Public Accounts Committee met to discuss the findings of the National Audit Office’s report on mis-selling. Tracey McDermott, acting Chief Executive and Executive Board Member of the Financial Conduct Authority, was called to answer MPs’ questions as part of the review, and told the Committee that she believed the risk of mis-selling had been drastically reduced, as there had been a fundamental shift in conduct and culture within the financial services sector.

We’ve certainly seen firms being far more proactive about managing poor conduct;  leading firms are much more on the front foot now, rather than in defensive mode. The provision of managed services (largely by Big 4 professional services and niche management consulting firms) to deal with historic and ‘business as usual’ reviews is becoming more commonplace too – in my own client work at PwC I have done a lot of work recently, partnering with big banks and wealth firms to make their complaints management processes more efficient and effective. The sector is also focusing more time and effort on anticipating and preventing future problems, rather than merely reacting when things go wrong.

Financial institutions have also taken steps to address the cultural issues that have contributed to the mis-selling scandals, although these changes have been heavily prompted by regulators. The latest in a long line of regulation, the Senior Managers Regime, came into force two weeks ago and this is being heralded as a mechanism to finally hold individuals accountable when issues like mis-selling scandals arise. The proof will be in the pudding.

So where are we now? The FCA recently dropped its plans to conduct a thematic review of culture in the financial services sector, focusing on middle management reward and whistleblowing. This was headline news, with the FCA receiving widespread criticism for their decision not to complete the review. However, the reasons provided by Ms McDermott appear sensible and pragmatic; culture is intangible and individual to each firm, so a sector-wide review was always going to be difficult. The FCA had also found that it was in danger of duplicating the work of other bodies such as the Financial Stability Board and Banking Standards Board – so rather than a sector-wide review, the FCA will now engage with firms on an individual basis around culture.

It is evident that progress is being made but can we ever completely eliminate the risk of mis-selling?  Management consultants, like me, have supported banks to put in place better governance processes and proactive reviews to avoid the need for these costly reviews.  For banks to risk the same thing happening again would be foolhardy, to say the least. I agree with Ms McDermott on this one – she told the Public Accounts Committee that the possibility of human error meant there was always going to be a fundamental risk involved in the selling of financial products that require advice. The problems that triggered the mis-selling of PPI have been well-documented – the products were typically poorly designed in the first place;   those selling the products weren’t always qualified to do so;   and they were often influenced by sales-driven incentives, rather than ensuring the product met the customers’ needs. Some of drivers of mis-selling have been addressed which has greatly reduced the likelihood of further scandals happening in the future. But have they gone entirely?  No-one can promise that.

This article for the WCOMC newsletter is adapted from a blog originally published by Mark Gossington on 18 March 2016.





Mark Gossington  Freeman

PwC | Partner | Financial Services
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PricewaterhouseCoopers LLP
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