FCA issues £90m fine to insurers for customer communications failures

The FCA has fined four UK insurance firms within the same banking group £90m for failings in the way they communicated with home insurance customers from January 2009 to November 2017.

The facts

The FCA has found that the insurers breached Principle 3 (Management and control) and Principle 7 (Communications with clients) in relation to the way they communicated with home insurance customers at renewal. The two key failing were:

• The insurers sent communications to customers which included language to the effect that they would be receiving a “competitive price” at renewal, when in fact it was likely that (as per market practice at the time) the renewal premium was higher than the customer’s original premium and higher than the premium offered to new customers. This failing was ongoing for a long period of time because no steps had been taken to check that the “competitive price” language was accurate and could be substantiated, despite the fact that there were policies and procedures in place that made it clear that communications should not include unsubstantiated language and periodic reviews were undertaken.
• Due to systems errors, certain customers received written communications informing them that they would receive a loyalty discount at renewal, however the discount was not applied and was not intended to apply.

The penalty

A fine of £90 million is a large penalty – the FCA has only issued 14 fines bigger than this and the majority of those related to LIBOR and FX manipulation breaches and PPI mis-selling complaints. The main reason the penalty is so large in this case is because the breaches were ongoing for an unusually long 9-year period. The FCA’s starting point for calculating the penalty was the revenue generated during that 9-year period, calculated by reference to revenue generated from renewals of home insurance product lines affected by the breaches. This figure came to £4.25 billion. The FCA found the breaches to be a level 3 (out of 5) in terms of seriousness, meaning that the starting point was £425 million (ie 10% of £4.25 billion).

Although £90m is a large penalty, when considered in the context of the £425 million starting point it is not as large as it might otherwise have been. To arrive at the end figure of £90m, the FCA applied an unusually large discount. The FCA initially reduced the penalty by 60% on the grounds that a penalty of £425 million would be disproportionate to the breach, and then reduced it by a further 25% to take account of mitigating factors.

As to the mitigating factors, a 25% discount is much higher than we normally see. There are only 5 other Final Notices against firms where a 25% or higher mitigation discount has been imposed. In these cases, the circumstances driving the discount appeared to be large fines from other regulators; large redress payments; prompt action to prevent harm; waiving privilege over investigation reports and exceptional senior management co-operation. In this case, the circumstances driving the discount appear to be the fact that the insurers volunteered in 2014 to cooperate with the FCA on a research project to test the impact of different ways of communicating with customers at renewal (and were the only home insurers to volunteer). So this is perhaps an incentive for firms to volunteer to assist the FCA with such projects.

Key lessons

One of the key lessons from this case is the importance of large organisations being linked up and not siloed in nature. This is illustrated in the Final Notice in two ways:

• first, although individual business units within the insurers had been dropping the use of the “competitive price” language over time, it was never considered whether that language was used elsewhere within the larger organisation and whether other changes needed to be made; and
• second, in relation to the loyalty discount language, although the language was removed when it was originally spotted there was no investigation into whether or not the affected customers had been receiving a loyalty discount (it transpires they had not but this did not come to light until the FCA investigation was underway).

This failure to take a holistic view across an organisation is something that remains a common feature across FCA Final Notices.

Final thoughts

It is interesting to note that there is no suggestion that had the Senior Managers and Certification Regime been in place during the relevant period, events might have been different - as was suggested by the FCA in the Final Notice to Liberty Mutual Insurance Europe SE (dated 29 October 2018). However, the Liberty case is perhaps distinct on the grounds that the senior managers were closely involved in the events in question (the underlying issue involved the outsourcing of complaints handling which was overseen by the Board).

A copy of the full Final Notice is available here.