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Blog: The final countdown for PPI – what challenges will firms face and how can they be mitigated?

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On the 2nd March 2017, the FCA announced the final details for its plans to place a deadline on PPI complaints, publishing PS17 / 3 following on from last year’s consultation (CP16 / 20).

The two-step approach to redress (where step one is the consideration of the appropriateness of the sale and step two is the consideration of the impact of undisclosed commission and profit share) is broadly similar to the points outlined within last year’s consultation.

Despite there being many questions outstanding, there is now at least the certainty of a confirmed deadline of 29th August 2019 for consumers to make a new PPI claims. Now that a time-bar has been announced, and guidance on both Plevin and profit share has been published, firms will indeed have gained confirmation on some of the challenges they will face in fairly executing on PPI closure and bringing to an end the longest and costliest remediation programme ever known within retail financial services.

So with this in mind, what are some of the key features of the FCA’s policy statement, and what challenges will this pose for firms as the PPI deadline approaches?

planning for closure

Now that a final deadline has been set, firms will need to ensure that they imminently start to execute on their plans to bring PPI to a close. The time-bar will be preceded by a two year consumer awareness advertising campaign to ensure that consumers are fully aware of the closure of redress relating to PPI.

As part of the regulatory time-bar, firms have also been asked to pro-actively contact those consumers who have previously unsuccessfully complained to firms and whom may now be eligible for redress under section 140 of the Consumer Credit Act (unfair relationships) due to the impact of undisclosed commission.

Previously rejected complaints and pro-active consumer communication

The FCA has confirmed that firms will need to be proactive in their identification and communication to those customers whose original claims were not upheld, but who are now eligible for redress on the basis of the precedent on commission set by Plevin vs Paragon.  The FCA has confirmed that the ‘50% tipping point’ for commission earned on the selling of PPI will apply and has also confirmed that profit share arrangements will be used in the calculation to evaluate redress payable above the tipping point.

The FCA’s initial indication of the number of customers who will need to be pro-actively contacted by firms is in the region of 1.2 million individuals, however, there will now be many more customers who may be eligible for redress following the precedent set by Plevin vs Paragon.

Mass engagement of customers through targeted communications comes under the banner of ‘business as usual’ for many firms, however, firms should also ensure  they are operationally prepared for increased levels of consumer contact (both inbound and outbound) on the back of this campaign. Hand-in-hand with this, firms should also have materially addressed the requirements following on from the FCA’s “Dear CEO” letter.

As part of the pro-active communication campaign, firms should consider how the communication will be viewed from a customer trust perspective. How can you make sure the message lands as intended with customers who will need to understand why they may be due redress after being previously rejected and to ensure the communication is viewed as authentic?

Indeed, some of the behavioural studies undertaken by the FCA (for example in Occasional Paper 23 – ‘a round-up of FCA experimental research into giving information’) show how firms can help to engage consumers. What steps are you taking to increase engagement as part of the communications campaign and ultimately to ensure a fair outcome for consumers?

Firms should be in a position to complete the proactive customer contact campaign in good time to ensure minimal overlap with the FCA’s own advertising campaign which is due to start August 2017. Indeed, from a trust and brand advocacy perspective, it is likely to better perceived if customers hear from their firm on the issues before they see independent messaging from the regulator or other sources.

Calculating redress – commission and profit share

The calculation of both commission levels and profit share agreements is likely to pose significant challenges for firms. Indeed, calculating profit share on an individual customer/product basis is likely to prove a particular challenge and firms will need to be confident in their assumptions if they are applying a single percentage figure across entire books of business.

Firms may well be expected to average the profit share across large proportions of their customer base, and so will need to ensure they are balancing fair customer outcomes and the risk of materially overcompensating above and beyond the FCA’s expectations.

Indeed, the FCA is unlikely to be prescriptive in its calculation and will more than likely expect firms to average out (or smooth) profit share levels across portions of the consumer base. Indeed, the assumptions which firms make at the front end should be verified and robust to stand up to any future regulatory scrutiny and prevent the potential for re-work.

Forecasting future complaints trends

i. The FCA advertising campaign

The potential for volatile contact / claims levels is an issue which has been talked about since the FCA first released details of a four-phased consumer awareness campaign that will remind consumers of their rights and inform of the new basis for lodging complaints.

It has now been confirmed that the awareness campaign will take the form of four or so ‘bursts’ of advertising activity on high reach channels (TV, billboards, digital display advertising). Additional to this are ‘always on’ communications, including a refresh of the PPI section of the FCA’s website and supporting information available from trade bodies.

Firms should consider how this feeds into their planning assumptions going forwards and should be able to respond swiftly as more details emerge from the regulator in relation to the advertising campaign.

ii. FOS and CMC activity

When forecasting the levels of claims activity, firms should be assessing their exposure to new complaints and finalising their capacity plans to ensure they are able to address complaints and queries in a timely fashion and in a compliant manner.

Indeed, with an estimated 120,000 ring-fenced Plevin cases sitting with the FOS and with CMC’s known to have been seeking pre-emptive mandates to appeal on behalf of consumers once the Plevin rules “go live”, the expectation of many industry stakeholders is that volatility should be expected and ultimately firms should seek to mitigate the risks posed here by effective capacity planning.

Examining all possible scenarios

There will be some unknowns for firms in the process of bringing to an end the most costly and persistent issue the financial services industry has ever experienced, however, through effective customer identification, subsequent scenario and capacity planning, validating and re-validating assumptions and staying engaged with the latest regulatory developments, firms should be able to establish with some accuracy what the next two and a half years will hold and plan accordingly.