Posted: 12th September 2014

The issue of ‘unsophisticated customers’ is at the fore of current regulatory news as the FCA fines AEGON subsidiary, Stonebridge International, £8.4m for inadequate conduct toward their low and middle income target markets. Up to 480,000 customers across the UK and the EU could be effected as the FCA found Stonebridge did not provide them with enough information, upsold more expensive products to them and discouraged them from cancelling their policies. This is the second time in recent months we have seen the FCA issue £million conduct fines for firms that have targeted unsophisticated customers. You may recall the £3.8m fine imposed on Yorkshire Building Society and Credit Suisse for misleading financial promotions relating to structured products for unsophisticated customers.

Tracy McDermott, Director of Enforcement and Financial Crime at the FCA, has said:

“Customers are entitled to expect firms to provide them with fair and balanced information to enable them to make the right choices about the product that is right for them. Stonebridge failed to do this and, when customers tried to cancel, put up barriers to prevent them from doing so. Firms must take responsibility for their outsourcing arrangements and ensure that they treat customers fairly.”

What went wrong?

Alongside the fine itself, the FCA has published its Final Notice, which raises a myriad of issues for firms to take into account. The range of concerns was very broad, but here are six in particular to consider

1. Oversight of a subsidiary

Stonebridge is owned, and oversighted, by large financial services firm AEGON. While the final notice is for Stonebridge, it is AEGON’s brand that has been across the press. This increases the reputational risk for firms operating such subsidiaries, also calling into question the effectiveness of group audit and compliance functions and wider business controls to monitor the compliance of subsidiaries in high-risk markets (such as outbound GI sales to unsophisticated customers).

2. Targeting unsophisticated customers

The final notice makes it clear that where firms are targeting unsophisticated customers, they need to increase the level of control around the sale and ensure the delivery of fair outcomes. As required by SYSC, controls need to be proportionate; this was not the case here due to the nature of the customer base.

3. Oversight of an outsourced sales force

Stonebridge had a responsibility to ensure that the firms acting on their behalf were delivering fair outcomes, especially given the customer groups being targeted. Yet, the outsourced firm’s point of sale information and incentive controls were deemed inadequate, with the final notice stating “Stonebridge’s poor systems and controls, and inadequate oversight of its outsourcing companies breached the FCA’s requirements that firms treat customers fairly and have appropriate systems and controls in place”.

4. Upselling more expensive products

Stonebridge advertised premiums at a certain rate, but if a customer answered “yes” when asked whether they had children and / or a spouse, they were automatically offered the family cover without being informed of the cheaper single cover available. Indeed, the training material stated, “we will be working on the assumption that the customer would like to cover all eligible family”. Presumptive sales of this nature will not be accepted by the regulator.

5. Upselling cancellation rights as a benefit

Stonebridge’s training materials encouraged the outsourced sales personnel to use cancellation rights to secure sales. This misrepresented the intent of the cooling off and encouraged the customer not to consider at actual point of sale whether they really needed or wanted the product. Stonebridge also hereby took advantage of its customers’ behaviours. As per the regulator’s stance on behavioural economics, firms should instead consider these biases to design a fairer sales process.

6. Creating barriers to cancel

Stonebridge created a series of post-sale barriers to customers who wanted to cancel including:

  • Incentives for successfully retaining customers who wanted to cancel their policies
  • Reduced cover offered to those who wished to cancel due to affordability. The reduced cover was often, not fully explained
  • Personnel would suggest that the customer re-review policy documents for a “more informed decision” thus delaying the customer’s decision to cancel
  • Customer services personnel refuted the customer’s concerns five times on occasion, to dissuade the customer from cancelling the policy entirely

Firms should be in no doubt that discouraging customers from cancelling is not acceptable.

Next steps

Stonebridge is carrying out an independent review of its past sales in the UK and EU by contacting the potentially affected customers to determine whether they should be compensated. £400,000 compensation has already been distributed to UK customers.

Firms should review the final notice in detail and take into account its warnings, particularly in relation to selling cancellation rights as a benefit, their approach to customers that want to cancel and the principles of effective oversight.


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