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Insurance disputes have doubled in the last year, putting complaints handling high up the FSA’s list of priorities. Chris Busby and Claire Frater report

Statistics from the 2008 Financial Ombudsman’s Service (FOS) annual review showed that insurance disputes have doubled in the last 12 months, and complaints regarding payment protection insurance (PPI) have risen six-fold. Echoing the call for greater transparency in the Hunt Review of the FOS, the Financial Services Authority (FSA) has issued proposals to publish firm-specific information on the numbers of complaints and how these are resolved.

Reports have crudely referred to this as a “name and fame” regime at one extreme and, perhaps more contentiously, “name and shame” at the other. While the FSA’s aim is clear, it raises questions as to what impact a decision in favour of greater disclosure will have and whether this will make any difference to the handling of complaints by institutions.

In the case for the impact of additional disclosure, the proposed code of practice is intended to achieve a number of ends, most notably: higher levels of consumer protection; promotion of the FSA’s statutory objectives; and improved compliance by regulated entities.

The deliberation over ‘name and fame/shame’ as a tool of effective regulation is nothing new. The Macrory Review of regulatory penalties, published in 2006, identified a number of themes apparent in regulated businesses generally, and made proposals to the Government which were designed to improve the effectiveness of regulation. While transparency was identified as an important regulatory tool, it was notable that the specific proposals in the final report did not include a “name and shame” regime for all regulated business. The report focused instead upon the publication of information where enforcement action has been taken in response to regulatory breaches.

In this regard, the Financial Services and Markets Act 2000 (FSMA) sets out the current framework for what the FSA can publish in connection with enforcement proceedings. Such disclosure is helpful as both a deterrent and as evidence that the FSA is achieving its objectives. For example, consider the recent crackdown on insider dealing. However, in reality, the scope of FSMA, and the impact of any associated criminal sanctions, restricts full disclosure. The length of regulatory proceedings can add to the problem. Newsworthiness decreases as time moves on, except in the most high profile of cases.

But does publicity actually act as a deterrent for all participants in the retail market? For small firms, FSA enforcement action can be a ‘bet the farm’ situation. Adverse publicity can be devastating for business, and therefore act as more of a deterrent than financial penalties. The impact on larger firms can be harder to predict, even though senior management are increasingly mindful of public censure.

Where financial penalties are imposed, similar problems arise. A fine against a smaller business might only serve to put the company in financial difficulties. Similar sanctions would have no real deterrent effect on a major firm. In either case, one is justified in questioning the effectiveness of those sanctions.

If the costs of the remediation were made public, this might have a deterrent effect, however, calculating those costs with any accuracy would not be easy. This suggests there are limitations to the impact of the FSA’s main enforcement tools.

In the impact of increased disclosure on complaints handling, one area in which the FSA sees transparency as a tool of enforcement is complaints handling, which itself, is a key element of the Treating Customers Fairly initiative. Its objectives are to ensure that complaints are dealt with promptly, fairly and appropriate remedial action follows.

Final notices have been issued to Sesame Limited, and more recently to Mandrake Associates, which have highlighted the need for effective complaints handling procedures. The FSA has demonstrated it will take enforcement action on this issue, and that complaints handling is high on its agenda.

The FSA is now proposing to make public information obtained from the firms’ complaints returns. This information is presently used to allow the FSA to monitor trends in complaints handling procedures and the performance of individual firms.

The discussion paper highlights the significant differences in performance between firms in this area. For example, of the 28 firms that deal with the largest number of complaints, the volume closed within an eight-week period ranged from 1% to 66%. The FSA proposes to address this by publishing information in table format, detailing the overall number of complaints received, the time limit in which those complaints are resolved, the percent of complaints upheld and the financial redress paid.

The disclosure will be limited, in that information will only be published for the firms that handle the largest number of complaints. This perhaps reflects the fact that the proposals are designed to act as a deterrent on the largest organisations, rather than smaller.

The FSA wants customers to be able to compare complaints statistics. However, it is not clear whether the FSA and consumers will be able to compare like for like in many cases. For example, the recent media focus has led to a large influx of PPI complaints from solicitors, claims managers and individuals. Of course, firms are required to answer every complaint, even where it has no foundation.

Many of the complaints are based on precedent letters, available freely online. In some extreme cases, complaints have been issued despite the customer not having taken out the product complained of. A major PPI seller is therefore likely to have a very high rate of complaints at present and in the near future. If it is crudely compared to a company that does not operate in this field, this could easily have a negative impact on the company’s reputation in the market.

The FSA needs to ensure that the proposals are clear enough to take account of these trends, and do not result in a distortion of figures. Firms are right to be concerned about what statistics will be published; how the information will be organised; and, most importantly, how comparisons will be made with other firms/providers. The discussion paper acknowledges some of the obvious problems in this regard, but does not contain enough detail of how it intends to ensure that those problems are overcome.

The FSA has stated its intention to focus on complaints handling over the coming months, and FOS has been complaining to the FSA about endemic failures in this area. Taking the proposals forward, the FSA intends to publish the first report showing aggregated data on complaints by the end of 2008. This information will be based upon data received from firms in the first part of this year.

The message for regulated firms is that now is the time to consider the effectiveness of their complaints handling procedures. The issue is high on the FSA’s agenda. Bad complaints handling is a definite black mark in the FSA’s book, and is seen as putting customers at risk of “double jeopardy”. It will be some time before the extent of this impact is fully known, but larger firms should consider acting now to protect their positions and reputations moving forward.

Chris Busby is a partner and Claire Frater a senior associate in the financial services regulation and litigation group at Eversheds.


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