Claims Management Regulation The PPI Claims market: Dealing with malpractice February 2013
CLAIMS MANAGEMENT REGULATION - THE PPI CLAIMS MARKET: DEALING WITH MALPRACTICE 3 Introduction It is generally now accepted that payment protection insurance (PPI) was mis-sold on a large scale. The total paid out for mis-sold PPI since January 2011 exceeds 8 billion, according to the Financial Services Authority (FSA). In April 2011, the High Court rejected a legal challenge by the banks against the Financial Ombudsman Service s (FOS) and the FSA s complaints handling requirements in relation to PPI mis-selling. Subsequently, there was a significant increase in media coverage, consumer group activity and general awareness about mis-selling and redress. This fuelled consumer interest in establishing whether they may have been mis-sold PPI and spring 2011 saw a new wave of claims management marketing activity as claims management companies (CMCs) began increasingly to recognise the growing profitability of this sector. There are currently about 1,100 CMCs (38% of the total number of authorised CMCs) operating in the PPI claims sector. PPI CMCs now account for the vast majority of consumer and non-consumer complaints we receive, with a minority accounting at any one time for over 50% of complaints. The reaction of CMCs to the mass miss-selling of PPI has brought with it a fall in compliance standards and an increase in poor practices. In November 2011 we established a specialist PPI Compliance Team to respond to growing concerns over the poor practices used by some CMCs when presenting claims for mis-sold PPI. Their focus is on: Improving CMC compliance through advice, action and warnings Reducing proportions of claims being submitted to financial services providers where no PPI sale exists and no customer relationship existed previously Reducing the proportion of claims being escalated to the FOS (by the larger CMCs) prematurely Promoting and facilitating improved relationships between financial services providers and compliant CMCs Reducing the number of (justified) consumer complaints about the largest CMCs Identifying CMCs committing serious or serial breaches of the rules and taking firm enforcement action against them This report presents a summary of the PPI Compliance Team s activities and achievements to date.
4 CLAIMS MANAGEMENT REGULATION - THE PPI CLAIMS MARKET: DEALING WITH MALPRACTICE 1. PPI audits - our approach Audit process 1. We initially identified and targeted about 50 of the largest and most complained about CMCs by financial services providers and consumers. Businesses are prioritised for audit on a risk assessed basis. This involves analysing data supplied by financial services providers together with scrutinising the type and volume of consumer and business complaints. The latter helps to establish rule breaches which can then be addressed at audit. This procedure inevitably identifies many of the larger CMCs who submit significant numbers of claims to financial services providers and generate higher volumes of complaints. 2. Audits are conducted with directors and key operational personnel present most often compliance and other operational managers. Some CMCs are represented by solicitors or consultants. The audits are comprehensive with emphasis on the following areas: Advertising and marketing (websites, television, radio and newspapers) Arrangements with introducers and agents 1 Client paperwork, including pre-contract information and terms and conditions Transparency of fees Handling of client money Collation of statistical data relating to claim success rates, volumes of cases referred to and/or upheld by the FOS, etc. Addressing complaints from consumers and financial services providers Correspondence, in particular the use of standardised template letters (see page 2, paragraphs 3 and 4) Listening to live and recorded calls and cross referencing the content to documentation produced Relationships with financial services providers including Fast Track Pilot Schemes (see page 8, paragraphs 3 to 5) Post-audit action 3. Following an audit, we confirm any advice we have given or action taken in a detailed written report. The report also gives the CMC a deadline by which full compliance must be achieved. CMCs are required to demonstrate they have remedied any breaches identified, for example by providing copies of revised documentation or amended procedures, or they will be subject to further enforcement action. 4. Businesses are formally warned about their conduct if we identify more serious compliance issues. Warnings are not only effective where a CMC does wish to comply, but enable us to take statutory enforcement action if they continue to breach the rules. Statutory action can range from restrictions being added to a CMC s licence, suspension (until they can demonstrate they will comply), or ultimately cancellation of their licence. All action is taken in accordance with our published Enforcement Policy. 5. Where warnings are issued they clearly detail the compliance issues identified, set out the rules CMCs are in breach of, the remedial action required within a given deadline, and the consequences of further non-compliance. 1 Third parties who obtain details of potential PPI claimants and pass them to the CMC
CLAIMS MANAGEMENT REGULATION - THE PPI CLAIMS MARKET: DEALING WITH MALPRACTICE 5 2. Common issues No PPI sale or no previous customer relationship 1. Information provided by financial services providers has highlighted a number of CMCs who are submitting significant numbers of claims where the CMCs have failed to establish if the consumer had PPI or was actually a client of the financial institution. The British Bankers Association (BBA) and a number of financial services providers are providing us with data about such activities on a regular basis. This has assisted us in identifying CMCs for audit and investigating the reasons for these types of claims being submitted. The underlying causes usually relate to CMCs: Failing to obtain sufficient information from the client to investigate the prospects of a claim or identify the appropriate financial institution Encouraging consumers to raise concerns without due cause Conducting phishing exercises on raw data purchased from unreliable sources Extensive or inappropriate use of Data Subject Access Requests 2. It is clear from speaking to CMCs and financial services providers that the overuse of Data Subject Access Requests (DSARs) 2 to confirm the existence of PPI causes problems for both parties. Dealing with these requests can be costly for financial services providers and their use fuels the suspicion that CMCs are conducting phishing exercises. Financial services providers are required to respond but they can ask for proof of identity and authorisation, as well as a fee of up to 10. The Information Commissioner s Office has expressed concern about the number of DSARs which financial services providers fail to respond to. Corroboration of mis-selling allegations 3. During an audit we review information initially provided by the client, any corresponding questionnaire completed by the CMC and the letter of claim sent to the financial institution. Some letters of claim do not correspond with the information provided and the CMCs are unable to substantiate or corroborate mis-selling allegations. Often these allegations are based on standardised information where the client is unsure about the existence of PPI on their loan, mortgage or credit card. 4. We consider these breaches to be serious and take enforcement action as appropriate. This will usually be in the form of a warning although statutory enforcement action is considered if the CMC has previously been warned about this practice. CMCs involved in such practices are also required to immediately cease submitting letters of claim until their procedures have been rectified to enable them to substantiate the mis-selling allegations from the evidence provided. 2 Under the Data Protection Act 1998 an individual can send an organisation a subject access request requiring the organisation to tell them about the personal information they hold about them, and to provide them with a copy of that information.
6 CLAIMS MANAGEMENT REGULATION - THE PPI CLAIMS MARKET: DEALING WITH MALPRACTICE Other issues/findings 5. Financial services providers continue to raise a number of other ongoing concerns about the practices of CMCs. These issues are addressed during audit and in our follow up work. These additional issues include: Objection to the use of template/standard letters often containing significant numbers of mis-selling allegations Allegations that CMCs do not exercise due diligence to ascertain whether PPI exists before submitting a claim Lack of/incomplete client questionnaires/information Lack of copies of agreements/policy numbers Overwhelming volumes of claims from individuals and CMCs Issues with claims being submitted in relation to the Insolvency Service where the clients have not been contacted and documentation has been signed by Insolvency Practitioners
CLAIMS MANAGEMENT REGULATION - THE PPI CLAIMS MARKET: DEALING WITH MALPRACTICE 7 3. Unsolicited text messages and marketing calls 1. The growth in the use of unsolicited text messages and direct marketing calls concerning mis-sold PPI has caused a nuisance to the general public. This problem presents challenges and we fully support the work of the Information Commissioner s Office (ICO) which has responsibility for enforcing the legislation that protects individuals from unsolicited text messages and other forms of direct marketing. 2. The main investigation challenge is identifying who is responsible for this form of marketing and building up sufficient evidence of abuses to take enforcement action. The text messages are generally not sent by CMCs but by others to generate leads for other businesses, including CMCs. CMCs that buy data or leads from data and lead generating businesses are required to ensure that the seller is appropriately authorised and thereby compliant with the Data Protection Act. Any CMCs which breach these requirements are subject to investigation and appropriate enforcement action. 3. We are actively working with the ICO to help target enforcement action against CMCs accepting leads generated by this type of marketing. These issues continue to be tackled through close working with a cross-regulator and industry working group to identify who is responsible and put an end to any illegal practices. The working group is led by the Direct Marketing Association and includes the ICO, Ofcom, other relevant regulators, telecom industry bodies, and mobile network providers. By pooling resources and sharing intelligence, this has enabled a more effective campaign of joined up action. 4. Education is an important part of this process. As part of a telecom regulators sub group led by Ofcom, we have produced joint guidance to inform consumers which regulator they should complain to when they receive nuisance calls and messages. 5. In their latest action, the ICO served two monetary penalties in November 2012 totaling 440,000 on two owners of a marketing company which had sent millions of unlawful spam texts over the past three years. The ICO is also currently considering issuing penalties to three other companies for breaching the regulations as it continues its crackdown on the illegal marketing industry.
8 CLAIMS MANAGEMENT REGULATION - THE PPI CLAIMS MARKET: DEALING WITH MALPRACTICE 4. Partnerships 1. We will continue to take a robust and co-ordinated approach to regulation. This involves working in partnership with relevant regulators, complaints handlers and industry bodies to identify emerging risks early on and take swift action to restrict or prevent malpractice. We have established good working relationships with the FSA, the FOS, the BBA, Building Societies Association (BSA), Finance and Leasing Association, UK Card Association and the Solicitors Regulation Authority, enabling effective exchanges of information about CMCs activities. In particular, we have developed reporting templates with the BBA, BSA and UK Cards Association for use by their members. 2. Evidence provided by stakeholders helps us to monitor CMC activity and whether improvements are being made. Where there are no signs of improvement, this information forms part of our investigations into CMCs and will support further enforcement action. CMC relations with financial services providers 3. Most of the major lenders have established fast-track arrangements with the largest CMCs. This helps them streamline the PPI claims process for consumers who choose to use them and minimise the burden on them which is often caused by high volume DSARs. We support and encourage the development of such mechanisms for improving the banks relationships with compliant CMCs. 4. Fast-track arrangements have proved successful in establishing whether PPI was sold to the client without the need for CMCs to use more time-consuming and formal DSAR procedures. Other positive outcomes include: Identification of PPI prior to complaints being raised Confirmation that complaints have been received Updates on progress Notification of offer and when clients have been paid Consumers having claims dealt with swiftly and efficiently 5. Arrangements can vary between the lenders and are not made available to all CMCs. There is often a restriction on the number of enquiries that the lenders will handle for each CMC each week. Most lenders do not notify CMCs when payment has been made to the client and none of the major lenders pay into CMC client accounts. This lack of communication can lead some CMCs to make repeated enquiries to the lenders or chase their fees before the consumer has received their settlement. This is reflected in the complaints we receive from consumers about the timing and method of a CMC s fee collection.
CLAIMS MANAGEMENT REGULATION - THE PPI CLAIMS MARKET: DEALING WITH MALPRACTICE 9 5. Progress and next steps Key developments 1. In the past year we have audited over 80 businesses and taken action where problems have been found. The severity of enforcement action is determined by the nature and magnitude of the bad practice identified and whether there is a need to act to protect the public. The following issues have generally been resolved by nonstatutory enforcement action (advice and warnings): Insufficient information being obtained from clients at the outset Incomplete or non-compliant paperwork issued to clients Non-compliant marketing including websites, adverts and marketing calls Inadequate investigations into existence of PPI or mis-selling allegations Client money issues (i.e. breaches of Client Account Rules 2006) 2. It has been necessary to formally warn 19 CMCs where more serious breaches of the rules were identified during audit, or it was found that the CMC had failed to heed previous advice given. These issues include: Inability to substantiate mis-selling allegations Acceptance of referrals or leads from unauthorised businesses Inadequate complaint handling procedures Misleading marketing or high pressure selling practices Future delivery 3. We will continue to take firm measures to tackle poor conduct and improve CMC compliance. We are reinforcing our PPI compliance team to increase our capacity to carry out more visits, audits and take more action. This includes stepping up enforcement action where CMCs persistently fail to respond to clear advice and warnings. 4. As part of our long term strategy to tackle malpractice, we are making arrangements to conduct follow-up visits to those CMCs where most instances of non-compliance were previously identified. Those CMCs audited in 2012 and advised or warned about specific practices will be revisited. We will be seeking to establish whether the CMCs have fully implemented revised procedures in response to advice we have given. During this period the CMCs concerned will also be closely monitored. Where significant non-compliance issues remain, we will take escalated statutory enforcement action. 5. We are also engaged in initiatives to expand our review of the marketing by CMCs. The programme will include more CMCs, particularly those who make outbound sales calls. Other marketing practices will also be reviewed, including television and radio commercials, as well as newspaper adverts and CMCs own websites. 6. Good progress has been made but much work remains to be done. We remain alert to developments, emerging, trends and changes in the medium to long-term future and take action to tackle and prevent malpractice. This includes continuing to listen to what consumers, financial services providers, relevant regulators, representative bodies and other stakeholders are telling us, and analysing and responding to the data and intelligence they provide.
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Contact Information For queries concerning information in this publication please contact: Ministry of Justice Claims Management Regulation Unit Headquarters 102 Petty France London SW1H 9AJ E-mail: claimsmanagementregulation@justice.gsi.gov.uk Website: www.justice.gov.uk/claims-regulation