CCP: UK lenders got up to 60% commission for mis-sold insurance

August 22, 2013 8:16 pm

CCP: UK lenders got up to 60% commission for mis-sold insurance

By Sharlene Goff

UK lenders that have agreed to pay up to £1.3bn to customers who were mis-sold credit card insurance received commission rates of up to 60 per cent, according to the regulator.

The Financial Conduct Authority said on Thursday that 13 banks and other card issuers would refund credit card customers who they referred to CPP, an insurance provider, for extra protection against stolen cards and identity theft.CPP was fined £10.5m last year for selling customers insurance that was already provided by their card issuer and overstating the risk of identity theft.

The FCA said the banks and credit card issuers that introduced millions of customers to CPP had to “share responsibility for putting things right”.

It is the latest in a series of compensation payouts made by banks to consumers who have been mis-sold financial products.

The failings at CPP related to a period of six years, from January 2005 to March 2011, when the company received £845m from customers taking out or renewing card insurance policies, according to filings by the FCA.

Typically CPP paid commission rates of about 30 per cent to its business partners. Tracey McDermott, director of enforcement and financial crime at the FCA, said lenders were, in some cases, earning fees of up to 60 per cent for referring customers to CPP.

One senior banking executive said the high commission rates led to a culture of “aggressive referring” of customers to CPP, even though the banks were aware that they were responsible for any losses incurred if customers had their cards stolen.

Another banking insider said the relatively small sums of money involved – the £1.3bn is a fraction of the billions of pounds lenders have set aside to compensate customers for mis-sold payment protection insurance, for example – suggested that banks were guilty of “oversight and sloppy governance” rather than a deliberate attempt to generate commission.

The £1.3bn compensation figure covers all of the 23m policies bought or renewed by 7m CPP customers over the six year period. It includes the cost of policies plus 8 per cent interest.

Hamish Ogston, founder and major shareholder of CPP, told PA News the £1.3bn figure was “b******s” and “ridiculous” as there had never been a redress scheme that paid out 100 per cent.

Five lenders – Barclays, HSBC, Santander UK, Royal Bank of Scotland and MBNA – share the largest exposure and were the first to be contacted about the compensation scheme by the FCA, according to people familiar with the process. The eight other lenders involved are Bank of Scotland, now part of Lloyds Banking Group; Canada Square Operations, formerly Egg Banking; Capital One; Clydesdale Bank; Home Retail, owner of the Argos store chain; Morgan Stanley; Nationwide Building Society; and Tesco.

On PPI they [banks] had to be dragged kicking and screaming into compensation. This time, they’ve moved really quickly to accept there is a problem and that they are going to have to pay for it

– Regulatory lawyer

Analysts expected Barclays to face the biggest hit as it has a dominant share of the credit card market. Paul Maddox, managing director for customer service at Barclays, said: “While for many people these products were entirely valid and provided benefits, some sales practices regarding past identity fraud and card protection policies were below acceptable standards and were not in the interests of our customers.”

The FCA said the fact that the banks and card issuers had voluntarily signed up to the scheme showed that they were “taking more responsibility and helping, step by step, to rebuild trust”.

A regulatory lawyer who frequently represents the major UK banks echoed this view, saying: “On PPI they had to be dragged kicking and screaming into compensation. This time, they’ve moved really quickly to accept there is a problem and that they are going to have to pay for it.”

CPP will start writing to customers from next week to explain how the compensation scheme will work. Ms McDermott said the aim was to make the process “as easy as possible” and stressed that there was no need for customers to go to claims management companies, which submit claims on customers’ behalf.

The way the compensation scheme is structured means CPP customers will be asked to vote on whether they approve of it. This process means that compensation is not expected to be paid until spring 2014.

Additional reporting by Brooke Masters and Adam Jones

 . . . 

Card activation call led to sales

Banks and other credit card issuers are on the hook for compensation payments because they introduced millions of customers to CPP, which was found to have widely mis-sold card protection.

Card issuers effectively forced customers unknowingly to contact CPP by making them call the group to activate their card. During the call, CPP would try to persuade customers to take out the extra cover.

Tracey McDermott at the Financial Conduct Authority, said: “People were not expecting to be sold insurance when they rang up. We were not happy about the way that worked.”

The FCA said CPP sold its card protection product by telling customers that they would benefit from up to £100,000 worth of insurance cover even though they were already covered. It also overstated the risks of identity theft.