Back to the beginning – root cause analysis re-booted by de facto PPI past business review

The FSA's guidance to firms on contacting PPI customers that have not complained marks a resumption of hostilities in the PPI arena and amounts, in effect, to an industry-wide direction to conduct a past business review (PBR).

It also takes every firm back to the beginning of the new rules on root cause analysis, with a clear steer on what the FSA thinks a PBR customer contact exercise should look like.

Policy Statement 10/12, published in August 2010, not only led to the ultimately unsuccessful BBA judicial review but (of longer term relevance) spawned, via Consultation Paper 11/10, the current DISP guidance on root cause analysis which provides:

"Where a firm identifies (from its complaints or otherwise) recurring or systemic problems in its provision of... a financial service, it should ... consider whether it ought to act with regard to the position of customers who may have suffered detriment from ... such problems but who have not complained and, if so, take appropriate and proportionate measures to ensure that those customers are given appropriate redress .... In particular, the firm should: (1) ascertain the scope and severity of the consumer detriment that might have arisen; and (2) consider whether it is fair and reasonable for the firm to undertake proactively a redress or remediation exercise, which may include contacting customers who have not complained."

The FSA's guidance consultation on 'Payment protection insurance customer contact letters (PPI CCLs) – fairness, clarity and potential consequences' is a consultation in name only given firms have only four weeks to respond.  It is a chaser to the PPI industry to remind them of their obligations to conduct root cause analysis and, where systemic problems are found, to write to customers who have not complained to assess if redress is due.  In effect, it acts as a direction to conduct a PBR.

The FSA's cost benefit analysis of prescribing the contents of the CCLs – a new and ominous acronym - quaintly suggested '[i]ssuing guidance as to the content of those letters is not expected to cause any material additional costs for such firms'. However, the guidance consultation itself acknowledges that 'such contact exercises would make a substantial contribution (between £1.1bn and £3.2bn) to the total consumer redress that we estimated would result from our overall package of measures.' Indeed, Martin Wheatley, the FSA Managing Director, has said that the FSA 'think[s] that the redress due from this process may well exceed what has been paid so far'.

While the draft guidance on the contents for CCLs is addressed to those involved in PPI mis-selling, of the points to include listed (a) to (h), only (g) and (h) are directly addressed to the problems of PPI. All of the points could – and one imagines the FSA thinks should - form the basis of a CCL addressing any future case of mass detriment. Thus the guidance, in effect, provides a CCL 'template' and its content is relevant for every regulated firm. That being so, this 'FSA-approved, template CCL' is worth repeating at some length.  Firms should "set out a clear and fair explanation of the following matters:

(a)        That the customer may have been mis-sold

(b)       Those key specific sales failings which have led the firm to conclude                    that the customer may have been mis-sold

(c)        That there may be other reasons, in addition to the examples given,                     why the customer may have been mis-sold

(d)       That the customer may have suffered financial loss as a result of the                  potential mis-sale, and so may be entitled to redress

(e)       The action the customer is invited to take in response to the letter (if                they consider they have been mis-sold), and how the firm will act on                   such response

(f)        The consequences of the customer not taking the invited action                            promptly

(g)       The explanations above should not be diluted or obscured

(h)        It should be made clear at the outset of the letter that it contains                        important information relating to the previous sale ..., and requires                     careful and immediate consideration."

The FSA's Retail Conduct Risk Outlook, published today, identifies numerous areas beyond PPI in which firms will be expected - and the FSA will be sure to - look.

Statutory 'option' for firms to self-refer to FCA

The pressure on firms to conduct root cause analysis and, if necessary, PBRs has been relentless since the rule changes of September 2011.  To add to it – in a rather odd and ambitious way - the Financial Services Bill now before Parliament contains a proposed new power for firms to refer themselves to (what will be) the FCA if they become aware of regular failures within their business which may have put consumers at risk of detriment.

Under the proposed new s.234C FSMA, a regulated person may make a reference to the FCA where they have identified their own regular failure to comply with FCA rules which may have resulted in consumer detriment such that the consumer would be successful if they brought legal proceedings against that regulated person and, if a complaint were made to the FOS, the ombudsman would be likely to determine the complaint in favour of the complainant.

The FCA must then, "within 90 days after the day on which it receives a ... reference under section 234C publish a response stating how it proposes to deal with the complaint or reference, and in particular—

(a) whether it has decided to take any action, or to take no action, and

(b) if it has decided to take action, what action it proposes to take.

(2) The response must— include a copy of the complaint or reference, and, state the FCA’s reasons for its proposals; include a copy of the complaint or reference, and state the FCA’s reasons for its proposals."

I would expect (to say the least) firms to be very reluctant to make use of this power, except to earn a regulatory dividend from self-referral. Combined with the new and enhanced obligations on firms to conduct root cause analysis of their own volition, such a reference is likely to be a prerequisite in the FCA's assessment of whether a firm has acted adequately on its own initiative to resolve matters.

The obligations on the FCA are hardly precise and I cannot immediately see what this new law will add to the Principle 11 duty to self-report, unless reference to 'publish' means the whole process will be open to public scrutiny in contrast to the current, confidential, process.  Any such referrals will increase the likelihood that the FCA will use its powers under the new s.404 to impose a single firm consumer redress scheme, likely including CCLs.

The new section also grants FOS the power to make similar referrals when it identifies numerous similar complaints amounting to mass detriment. It is clear that this provision is designed to prevent a repeat of the FSA's perceived slow response to the unfolding PPI scandal about which FOS had been warning. I wonder if (and, if so, how) FOS will use this power, combined with the revised MoU proposed with the FCA, to take the opportunity to report individual firms.

The FSA's determination that the FCA will not be caught out in any future consumer detriment scandal is laying a siege around the financial services sector.  Conducting and following through with root cause analysis will become the only way out.