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FSA/PN/102/2012
15 Nov 2012

The Financial Services Authority (FSA) has issued its joint largest retail fine of £10.5 million to Card Protection Plan Limited (CPP) for mis-selling insurance products.

CPP has also agreed to pay redress and estimates that around £14.5 million will need to be paid to affected customers, but this could change depending on how many customers respond to CPP's contact exercise.  CPP has estimated that the total costs of the FSA's investigation will be £33.4 million which includes the fine, redress and the costs associated with the investigation.  The fine is for all types of sale made by CPP while the focus of the redress exercise is CPP's direct sales.

The FSA found widespread mis-selling of CPP's two main UK products between January 2005 and March 2011.  CPP failed to treat its customers fairly and did not provide clear information to its customers:

  • CPP sold its Card Protection product by emphasising that customers would benefit from up to £100,000 worth of insurance cover - when this was not needed because customers were already covered by their banks; and
  • CPP overstated the risks and consequences of identity theft during sales of its Identity Protection product.

CPP sold Card Protection and Identity Protection through its own sales channels, or through a partner, such as a high street bank, which introduced its customers to CPP. Card Protection cost about £35 a year while Identity Protection cost about £84 a year. In total, CPP sold 4.4 million policies and generated £354.5 million in gross profit.

In the period in question, 18.7 million policies were renewed which generated an income of £656.5 million. Following FSA intervention in early 2011 CPP has improved its renewal process and extended the cooling off period during which customers can change their minds about buying the product from 14 days to 60 days.

CPP agreed with the FSA requirements to stop new sales of products (apart from where the insurance is sold as part of a package) and to stop trying to keep customers who call to cancel their policies.  The FSA has required CPP to appoint an external 'skilled person' to monitor and report on its claims and complaints handling.

The FSA found that CPP's sales process focussed on sales, revenue and commercial objectives at the expense of treating customers fairly. The FSA's investigation revealed that:

  • CPP sales agents were encouraged to be overly persistent in persuading potential customers to purchase the products even after they had made it clear that they did not wish to buy them;
  • CPP gave its sales agents targets for successfully dissuading customers who contacted CPP to cancel their policies;
  • CPP did not prevent sales agents telling customers to buy the products on the basis that customers could cancel them during the cooling-off period; and
  • CPP renewed and took payments from customers without reminding them when it did not have current addresses and could not send renewal documentation.

Customers generally do not need insurance for fraudulent transactions on lost or stolen credit and debit cards because they are not liable for unauthorised card payments - apart from in exceptional circumstances.  However CPP continued to sell Card Protection by emphasising this insurance aspect of the product.

CPP also failed to control its affairs responsibly and effectively. This is because it was aware that significant issues about its sales and compliance processes had been raised by the FSA but it failed to take sufficient action to deal with them. 

Tracey McDermott, the FSA's director of enforcement and financial crime, said

"This is a serious case, one that has warranted our joint largest retail conduct fine and generated a sizeable bill for consumer redress.

"While CPP's products were relatively inexpensive, they were sold widely and CPP encouraged its sales agents to be overly persistent.  This exposed a very large number of customers to the unacceptable risk of buying products they did not want or need. Further, we had already warned the firm that it might be misleading customers about a feature of Card Protection from which customers were unlikely to benefit, but insufficient action was taken to rectify this.

"We have highlighted before our concerns about low cost insurance that offers little or no value to the customer. This case shows the action we will take if our warnings are not heeded".

CPP agreed to settle at an early stage entitling it to a 30% discount on its fine. Without the discount, the fine would have been £15 million.

CPP has agreed to provide an undertaking about a contract term it used which was unfair. This unfair term allowed CPP to take customer payments from another card covered by Card Protection in the event that payment could not be taken from the original card. The purpose of having multiple cards registered was to ensure that all cards were covered by the protection, but CPP used it to take payment from customers.

Notes for editors

  1. The Final Notice for CPP.   Formal requirements imposed on CPP by agreement with the FSA are set out in CPP's entry on the FSA Register, which can be found here.  CPP may in future apply to the FSA to have these restrictions lifted subject to satisfying the FSA as to the appropriateness of its funding structure, governance arrangements and control environment.
  2. CPP announced in September 2012 that it continues to have constructive discussions with the FSA about customer redress and that these discussions have included certain of CPP Group's larger business partners.  CPP has announced that these discussions include consideration of the use of a Solvent Scheme of Arrangement as a vehicle for providing redress.  For confidentiality reasons, the FSA cannot comment further on any ongoing discussions about redress with other parties, but will announce further details, if appropriate, in future.
  3. From 14 January 2005 to March 2011, CPP sold 4.4 million Card Protection and Identity Protection policies and received £188.3 million in customer payments (a proportion of which it paid to its business partners for an introduction fee) for those new sales.  CPP renewed 18.7 million Card Protection and Identity Protection policies and received £656.5 million in customer payments (a proportion of which it paid to its business partners for an introduction fee) for those renewals. CPP generated gross profits of £354.5 million and net profits of £79.1 million
  4. Some business partners 'introduced' their customers to CPP by affixing a sticker to the new credit or debit cards sent to their customers. The sticker prompted the customer to call a number (which was actually CPP's) either to activate the card or to confirm that the customer had received the card. When the customer did ring the number, CPP also used the opportunity to offer Card Protection and/or Identity Protection to the customer.
  5. The FSA has previously warned about low cost insurance products in its 2012/13 Business Plan, its 2012 Retail Conduct Risk Outlook and in a speech by Martin Wheatley to the Association of British Insurers in September 2012.
  6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
  7. The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent in late 2012 or early 2013, subject to the parliamentary timetable.

 

 
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