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Bank of Scotland fined for root cause failings

27 May 2011

Far sooner than I expected, on Wednesday the FSA sent a strong message to the complaints handlers in every regulated firm that the rules on root cause analysis mean what they say.

A firm must not only conduct root cause analysis, and implement improvements found to be necessary, but must also (in the language of the current guidance - DISP 1.3.5'consider whether it ought to act on its own initiative with regard to the position of customers who may have suffered detriment from, or been potentially disadvantaged by such factors'.

The FSA's Final Notice issued to BoS focussed on the bank's failures to analyse trends in its own complaints decisions and those made by the FOS to identify emerging issues and to carry out root cause analysis to 'identify and remedy any issues in its processes'.  The press release gave the example of failing to make improvements to a risk profiling tool (reinforcing the message about such tools from the March finalised guidance on assessing suitability), but firms will be more concerned to see emphasis in the body of the final notice (at paragraph 4.21) that the bank 'should have considered whether it needed to act on its own initiative to carry out a review of its past advice-related complaints ... to ensure they did not suffer detriment or were not otherwise disadvantaged as a result of BOS’s handling of their complaint'.

The real threat of the root cause rules is the requirement on firms, of their own volition, to conduct a proactive review of past business and pay redress where due. Whilst having to review complaints that were previously rejected is bad enough, the rules also require firms to review previous advice where systemic problems are identified.  The sting in the tail of the BoS final notice (at paragraph 4.33) is that the bank has to conduct a targeted review of 8,000 advised sales which relied on its psychometric risk profiling tool.  The estimated £17m compensation cost dwarfs the £3.5m fine.

The FSA's press release said its new complaints handling rules would be published 'imminently'.  Assuming the guidance proposed in CP 10/21 is adopted, the current PPI complaints handling rules will 'apply to the root cause analysis of all types of complaint'.  They provide: "Where a firm identifies (from its complaints or otherwise) recurring or systemic problems ... it should (in accordance with Principle 6 (Customers’ interests) and to the extent that it applies), consider whether it ought to act with regard to the position of customers who may have suffered detriment from, or been potentially disadvantaged by such problems but who have not complained and, if so, take appropriate and proportionate measures to ensure that those customers are given appropriate redress or a proper opportunity to obtain it.  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.’

And before anyone thinks to challenge the new rules, the FSA's statement ("As we made clear in PS10/12, this is not a new requirement, but simply a restatement of requirements that have been in force for many years") was recently accepted by the High Court in rejecting the BBA's judicial review.

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