The Financial Conduct Authority (FCA) came in to being promising to be a tougher regulator than its predecessor, the Financial Services Authority. Indeed, recent months have seen the two largest fines ever imposed for failings in retail activities.
In December 2013, a £28 million fine was imposed on Lloyds Banking Group over its remuneration structures. In February 2014, this was trumped by a £30.6 million penalty against HomeServe Membership Limited.
The findings against HomeServe are wide-ranging, covering mis-selling, remuneration, complaints handling and senior management controls. The fine covers activities over an extended period – from January 2005 to October 2011.
HomeServe is an intermediary which sells home emergency and repairs insurance.
HomeServe salespeople could receive considerable financial rewards, and could more than double their basic salary in commission. Only 20% of the commission could be deducted if the salesperson’s internal quality assessments were poor. The deductions in commission payments for having complaints upheld against them were also very small.
HomeServe gave staff financial incentives to close complaints. This meant that many complaints were never investigated fully, and in many cases were simply closed via an apology, or a goodwill payment of no more than £200. Complaint handlers were subject to very low levels of internal quality checking, and there were no financial consequences for having a low quality score. Over 8,000 customers did not receive adequate compensation as a result.
On several occasions, board meetings at HomeServe ended without compliance matters being discussed in depth, even though internal compliance assessments had indicated serious concerns. The post of Legal and Compliance Director was abolished in 2010, and from that point, there was no formal compliance reporting at board meetings. Senior management received very little training on regulatory issues.
Many customers were sold insurance over the telephone, without the exclusions and other key product features being highlighted to them. 69,000 customers were victims of mis-selling as a result. Computer glitches also led to a number of customers being overcharged, and others being sold duplicate insurance cover.
Since these issues were identified, HomeServe has offered compensation to customers affected by its failure to handle complaints effectively, the failure to explain the products fully and the errors in its IT systems.
Tracey McDermott, the FCA’s director of enforcement and financial crime, commented on the fine by saying: “HomeServe is another example of a firm that has acted without proper regard for its customers over a long period of time.”
“The firm’s culture, controls and remuneration structures meant that staff were focussed on quantity, not quality, and there were customers that paid the price for that.”
“True change in the culture within the financial services industry will only be achieved when firms and their management accept and deliver on their responsibility to ensure that customers are treated fairly.”
Homeserve founder and chief executive Richard Harpin stressed the changes that had occurred since 2011, by saying: “We have transformed the business, rebuilding and strengthening the management team, retraining staff and restructuring systems and controls. We have worked very hard over the last two years to put customers back at the heart of our business.”
HomeServe is a very different company from your average local financial advisory practice. But all regulated firms should take note of the findings in this case. All firms need to ensure that their remuneration structures are such that they do not encourage mis-selling, that they fully investigate complaints and offer sufficient redress where appropriate, that they fully explain the products they are recommending and that their board of directors or equivalent fully embrace a compliance culture within the firm.