British banks and financial institutions were asked to shell out £1.3 billion in compensation for mis-selling insurance from Card Protection Plan. What lessons can we learn from this episode?
In a first of its kind, the UK regulator had, in November 2012, imposed the largest fine of 10.5 million British pounds (equivalent of over Rs100 crore) on an insurance company called Card Protection Plan Ltd (CPP) of UK for mis-selling insurance products to consumers through banks and other financial institutions since January 2005.
As per the press release dated 22 August 2013, the Financial Conduct Authority (FCA), the UK regulator, it is reported that two insurance products, called ‘Card Protection’, which cost around £30 per year and ‘Identity Protection’, which cost about £80 per year were widely mis-sold by CPP. Customers were given misleading and unclear information about the policies so that they bought the cover. The cover was neither needed nor did it cover risks that had been greatly exaggerated. In addition to selling directly to customers, high street banks and credit card issuers introduced millions of customers to CPP, the insurer; thereby 13 more institutions became parties to this misadventure.
The key failings on the part of the insurance company identified were:
• CPP sold its Card Protection product by emphasising that customers would benefit from up to £100,000 worth of insurance cover. This was not needed because customers were already covered by their banks;
• CPP overstated the risks and consequences of identity theft during sales of its Identity Protection product.
Protection of consumer is paramount in Great Britain:
Not satisfied with imposing the aforesaid fine on the insurance company the FCA, in pursuance of its objective to secure an appropriate degree of protection for consumers and to enhance the integrity of the UK financial system, compelled the insurer and all those banks and institutions who had sold the policy to refund the premium charged along with interest at 8% to all the policy holders, who were mis-sold these policies since 14 January, 2005.
This agreement arrived last week between the FCA and the following institutions would result in providing redress to seven million customers, who between them bought and renewed about 23 million policies during the last about seven years. The redress bill could be up to £1.3 billion (about Rs13,000 crore) and redress per customer will depend on the type of policy (or policies) owned and the length of time it was held.
Here are the institutions involved in mis-selling insurance:
• Bank of Scotland Plc (part of Lloyds Banking Group)
• Barclays Bank Plc
• Canada Square Operations Limited (formerly Egg Banking Plc)
• Capital One (Europe) Plc
• Clydesdale Bank Plc (part of National Australia Group Europe)
• Home Retail Group Insurance Services Limited
• HSBC Bank Plc
• MBNA Limited
• Morgan Stanley Bank International Limited
• Nationwide Building Society
• Santander UK Plc
• The Royal Bank of Scotland Plc
• Tesco Personal Finance Plc
• The Card Protection Plan Ltd. the insurance company primarily responsible.
This is a great victory for the consumer movement in Britain. It is also a great achievement for the regulator, who brought all those banks and institutions to their knees. The FCA forced them to refund entire premium collected for more than seven years, along with interest at 8%, when the prevailing deposit rates are less then 2% presently in UK.
What is the role of FCA of UK?
The action initiated by the UK regulator is a suo motu step based on their own observations of what was happening in the markets. This is a classic example of how they protect the consumers. In fact, the FCA is established under the UK Financial Services Act, 2012 for not only regulating all the players in the financial services industry but also with the objective of protecting consumers and to champion their cause to ensure that they get a fair deal.
The Financial Services Act came into force on 1 April 2013. The Act makes fundamental changes to the way that financial services providers, like banks, are regulated. The Act will protect consumers and supervise all firms to ensure that business across financial services and markets is conducted in a way that advances the interests of all users and participants.
What lessons can we learn from this episode?
Unfortunately, In India, we do not have a common regulator for all the financial services as it is in the case in UK. None of our regulators have been able to take stern action for mis-selling of insurance products by banks so far, leaving the consumers to their fate. With the Insurance Regulatory and Development Authority (IRDA) recently giving its nod for banks to become insurance brokers, the whole picture of marketing of insurance will change (it also depends if the Reserve Bank of India (RBI) permits banks to go along with this proposal). But what is important is that before permitting banks to become insurance brokers, RBI should come out with stringent norms for all players in the market and enforce them with an iron hand, with a view to safeguard the interest of all the consumers. It should also protect them not only against mis-selling but also against conning with all types of guarantees and promises, with no intention to honour them.
Mis-selling of insurance is so much imbedded in the industry that even Rajiv Takru, secretary, financial services at the ministry of finance, was himself a victim of this scourge many years back. Here is what he narrated at an event in Mumbai, reproduced from Moneylife
, dated 14 August, 2013…
“Mr Takru gave his own example where he was mis-sold by a smooth talking Life Insurance Corporate of India (LIC) agent in 1992. He was told that the premium of Rs3,000 has to be paid for 15 years. In case of unfortunate death, his family will get Rs1 lakh. If not, then he can claim the maturity benefit of Rs1 lakh at the end of 15 years. After diligently paying premium for 15 years, to his shock he found that the maturity benefit will be paid when he turns 80 years. So, he has to wait for another 34 years after premium payment term of 15 years to get his Rs1 lakh. He says that if it can happen to a literate person, then it is surely an issue for illiterate persons.”
Today, in India, we do not have a single unified statutory authority that can protect and champion the cause of the consumers on the lines of the FCA in UK. This has resulted in making the consumer a pauper (not a proverbial King) and silently suffering like an orphan left to fend for him or herself. Mis-selling of insurance or for that matter any financial service is not only unethical but cruel in a country where a substantial part of the population is not enough literate in financial matters. The inability for the financially illiterate to understand the implication of insurance and banking terms written in small print makes a mockery of the entire financial system.
Role of Moneylife in protecting victims of mis-selling financial products
Against this state of affairs in our country, the movement initiated by Moneylife Foundation to guide, educate and protect the victims of mis-selling without any expectation of reward or return, is a laudable effort. They deserve the support of every citizen of this country. Only by spreading financial literacy and empowering people will there be hope to minimise mis-selling, which has considerable implications on the life of an ordinary person.
The success stories of Moneylife Foundation published in the recent past in securing justice to several victims of mis-selling is a testimony of how a non-governmental organization (NGO) and not-for-profit institution could achieve success without any support from the government.
Let us, therefore, put our shoulders to the wheel of Moneylife Foundation by contributing our mite through our ‘tan, man and dhan’ to support a movement that can provide succour and relief to a large number of our people, but can survive only with your support and patronage.
(The author is a banking analyst and is a regular contributor on banking and finance. He writes for Moneylife under the pen-name ‘Gurpur’.