The House of Commons Committee of Public Accounts (the PAC) published a report on 13 May, into mis-selling in financial services (the PAC Report). The PAC Report is primarily concerned with the redress which was paid to consumers as a result of payment protection insurance mis-selling. The PAC Report contains a number of recommendations intended to correct certain perceived failures by the FCA and HM Treasury to prevent mis-selling and to improve access to redress: ‘the FCA and the Treasury must do more to know how much mis-selling is happening now, and which regulatory activities work best to prevent it’.

The PAC Report is generally critical of the role which claims management companies have played in PPI redress. However, the PAC Report goes further in identifying several areas in which HM Treasury and the FCA are seen to have failed to prevent further mis-selling. The PAC has published a number of recommendations which are anticipated to drive the regulatory agenda in this area over the coming year. All authorised firms should understand the PAC’s concerns, and the likely regulatory action which will ensue.

Cultural failings in firms

The PAC Report highlights cultural failings within financial services firms as one cause for mis-selling, although it acknowledges that there are many factors which contribute to mis-selling. In some ways, the PAC Report picks up on failings which the FCA has previously identified as potential risks to the protection of consumers, under the general head of ‘conduct risk’.  However, the PAC Report specifically concludes that the FCA has not done enough to tackle the cultural problems that lie behind mis-selling by financial services firms. The PAC Report expresses concern that middle managers in financial services firms were often promoted on the basis of achieving sales targets, making it harder to embed customer-focused approaches. Although some steps have been taken by the FCA to improve culture in firms, the withdrawal of a proposed review into banks’ culture, and the failure by the FCA to articulate the type of culture it expects firms to have, have led the PAC to conclude that there is no guarantee of improvement in culture as the regulatory spotlight moves away.

The PAC Report therefore recommends that the FCA outline the actions it will take to improve culture in financial services firms. The FCA is invited to report on their effectiveness in May 2017. Consequently, firms should expect that over the course of the next 12 months, the FCA will resume its investigations into firms’ culture. The scope of the PAC’s concern is wide ranging across the authorised landscape, and we anticipate that the FCA will review cross-sections of firms across the piece to understand cultural failings, and to develop plans to address them.

The risks of innovation

The PAC also expresses some concern that the FCA’s focus on innovation could detract from consumer protection, and that ‘product innovation can make mis-selling more likely, particularly if products are especially complex’. The FCA has been careful to couch its support for innovation in financial services in terms which make clear that consumer protection remains a core priority. It remains to be seen what impact the PAC’s concerns will have on Project Innovate, and the FCA’s drive in that area.

‘Outcomes-focused regulation’?

The PAC Report has also concluded that the FCA does not do enough to ensure that consumers understand the financial products they are buying, and the possibility of claiming compensation. The PAC appears critical of a ‘rules-focused’ regime, where the regulator focuses on ensuring that firms adhere to detailed rules, rather than ensuring that firms do enough to check that consumers fully understand the products they buy. The FCA has been tasked with developing a plan to ensure that firms check consumer understanding of products purchased, and of their rights to claim compensation (particularly for vulnerable consumers) and to report back in one year.

HM Treasury oversight

HM Treasury’s assessment of whether the FCA is doing a ‘good job’ in preventing mis-selling was found to be weak, according to the PAC Report. The PAC note that there are no good indicators of the current level of mis-selling, and it is therefore very difficult for HM Treasury to assess whether the FCA is helping to reduce it. The PAC Report highlights gaps in the information collected by the FCA from firms relating to complaints, which does not identify when alleged mis-selling took place. The FCA also fails to draw information together which could show if its actions are reducing mis-selling. The PAC has therefore recommended that HM Treasury and the FCA should develop ‘real-time’ indicators of the extent of mis-selling, and assess regularly how effective their actions are in reducing it.

View PAC Report: Financial services mis-selling: regulation and redress, 16 May 2016