The FSA's largest retail fine for scandalous mis-selling. The real scandal is the fine is so small compared to the scam.

The FSA imposed a "record fine" on CPP, who describe themselves as a provider of "Life Assistance products designed to make life less stressful". A penalty that CPP has accepted. 

The greatest scandal is not what CPP got up to, but the FSA's performance in this debacle. What CPP did is typical of what financial services companies do: mis-sell (PPI; Mortgage Endowments; Personal Pensions; Interest Rate Swaps...). 

Don't blame a dog that is trained to bite when it does bite - blame the trainer. The FSA has been training the financial industry for years that the penalties of biting their customers will be a tiny fraction of their profits. CPP is just the latest case in point, showing that even in the final months before the FSA is closed and replaced in 2013 it is determined to live down to its abysmal reputation. We sincerely hope that the FSA is being closed, though rather fear it is being cloned into its 'replacement' the spookily similarly named Financial Conduct Authority (FCA). After all, financial companies are among the most generous donors to political parties, and the most extravagant lobbyists (£92 million was spent by finance industry on lobbying in 2011).

The FSA’s “record fine” imposed on CPP exposes a number of nasty facts. None  nastier than the fact that the total stated penalty was less than 3% of the money taken by CPP selling the products in question. All the following facts are extracted from the FSA’s judgement. The two products CPP was punished for were Card Protection and Identity Protection. Each was sold as insuring you against the costs of fraudulent use of your card or your identity.

1)      Sales and Fines

The FSA imposed a “record fine” of £10.5 million. CPP also "estimates that around £14.5 million will need to be paid to affected customers" (presumably this small amount is because CPP assumes most customers won't claim - unless the claims handling companies get in on the act!!)  Sounds a lot? Well, that would depend on how much CPP made from selling these products. According to the FSA judgement:

“The principal sales failings which the FSA has identified relate to the period from 14 January 2005 to March 2011. During this period:

• CPP sold 4.4 million Card Protection and Identity Protection policies and received £188.3 million in customer payments
• CPP renewed 18.7 million Card Protection and Identity Protection policies and received £656.5 million in customer payments
• CPP generated gross profits of £354.5 million and net profits of £79.1 million.

A £10.5 million fine, and £14.5 million compensation bill? But CPP took £844.8 million in customer payments. The FSA punishment was just over 1% of sales, and compensation amounted to less than 2% of sales.

2)      The true breakdown of the money you paid for your cover

So, perhaps the vast bulk of money taken went to pay insurance companies for the insurance protection? The FSA's document states: 

“CPP’s Card Protection cost approximately £35 per annum (depending on the business partner and when it was sold). The £35 payment is broken down as follows:

• CPP received approximately £34.40 for its “insurance intermediary services” and paid a specified percentage of that to relevant business partners (in some cases up to 60%) for introducing CPP to their customers
• a premium of approximately £0.60 (inclusive of insurance premium tax) which covered the provision of all insurance and non-insurance features of the product.”

i.e. for the £35 paid by a customer for card protection, the actual insurance premium cost 60 pence - that's less than 2p in the pound of the original payment. The rest of the money, £34.40 out of £35, was pocketed by CPP and the business partners who introduced the customers. CPP were presumably happy to hand 60% of the money to its business partners because this was essentially 'free money' for CPP. CPP's job was just to collect it.

The FSA's document went on to say: 

“CPP’s Identity Protection cost approximately £84 per annum (depending on the business partner and when it was sold). The payment is broken down as follows:

• CPP received approximately £68 for its “insurance intermediary services” and paid a specified percentage of that to relevant business partners (in some cases as much as 50%) for introducing CPP to their customers; and
• a premium of approximately £16 (inclusive of insurance premium tax) which covered the provision of all insurance and non-insurance features of the product. “

i.e. for the £84 paid by a customer for card protection, the actual insurance premium cost £16. The rest of the money was pocketed by CPP and its business partners.

3)      The fibs you were told to persuade you to buy the cover

Telesales are typically done by the salesperson reading a script. The salesperson operates like a computer in the role-playing games: depending on the customer's responses, the script the salesperson reads from branches to their next statement. (Writing these scripts is no less challenging than writing for the teledrama Downton Abbey, and just as fictional). According to the FSA document:

Card Protection:

• Pre-notification cover provided customers with up to £5,000 of insurance for unauthorised transactions which occurred before they notified CPP that their cards were lost or stolen.

However, cardholders are not liable for more than the first £50 if the transaction falls within the Consumer Credit Act 1974 (which is very often the case and so this aspect of cover was of very limited value). Further, for transactions that are not covered by that legislation, the customer is only liable for more than the first £50 if they have been “grossly negligent”.

• The post-notification feature purported to provide customers with up to £50,000 or £100,000 of insurance (the figure varied over the Relevant Period) for unauthorised transactions which occurred after customers notified CPP that their cards had been lost or stolen.

However, cardholders are not liable for unauthorised transactions after they notify their card issuers that their cards have been lost or stolen. “CPP continued to approach its sales pitches in this way despite being alerted to the problem by the FSA on 5 June 2008”.

Identity Protection:

• “up to £60,000 of insurance to make sure you do not end up out of pocket when clearing your name”

but failed to explain that the insurance only covers administrative and legal expenses. They did not explain that the insurance does not cover debts fraudulently taken out in the individual’s name (although the customer is not liable for such debts in any event).

• In response to a customer’s objection that identity theft will “never happen to me” the sales agent was told to respond, “APACS state 1 out of 5 of us will be a victim of ID crime by the end of the year”.

The UK Payments Administration website, which holds the APACS information, did not contain information to support this statement for identity theft in 2008 and the statistic itself is not supported by any reputable statistics.

• the sales agent referred to a “40% increase in identity theft in the last year alone”

CIFAS’ website indicated a 1% increase in identity theft cases between 2009 and 2010.

• The sales agent told customers that they were legally liable to repay debts fraudulently taken out in their names when this was not true.

With fibs like this being read off a script, presumably the vast bulk of policies were mis-sold. And yet the FSA has accepted CPP's intention to pay back 17 pence out of every pound they took (compensation = £14.5 million, total takings = £844.8 million).

4)      And then the policy renewals:

Arguably having paid for valueless insurance for a year, a customer would not be taken in for a renewal. According to the FSA document: 

“In some instances, as explained further below, customers never received the [notification of renewal] letter because CPP failed to keep an up-to-date customer address list. In those cases, the customer was unlikely to become aware that CPP had renewed his policy unless he reviewed the credit or debit card statement that captured that payment.

By that time, it was generally too late to cancel the policy because, as provided in the policy terms and conditions:

• the policy automatically renewed within 14 days from the date of the notification letter; and
• once the cancellation window closed, a customer was required to pay for the whole year and it was not possible to receive even a partial refund.

5)      The ruthless way the big banks were sending their customers to CPP like lambs to the slaughter. For which the banks were getting up to 60% of the customer’s money as commission.

Was CPP the prime culprit? It is the only villain named by the FSA in its judgement.  According to the FSA document: 

“The majority of its sales were “introduced sales”, sales which occurred when a business partner introduced its customer to CPP to give CPP the opportunity to sell Card Protection and Identity Protection. CPP paid relevant business partners a commission for each original sale and a further commission each time the customer renewed his policy.

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, known as “card activation”; or
• to confirm that the customer had received the card, known as “safe receipt”. ”

i.e. what the customer thought was a call to confirm safe receipt was actually a sales cold-call. Worse than a normal cold-call, the customer did the dialling and paid for the call!

In a final flourish, to prove where its true loyalties lay, the FSA “as a result of CPP’s current financial position” agreed to allow the culprit to pay the fine in six instalments over two years. Presumably in order to avoid disrupting business as usual. The FSA document states:

•  “The financial penalty is to be paid in 6 instalments. The first instalment of £2 million must be paid by CPP to the FSA within 14 days of the date of the Final Notice. The next instalment of £2 million must be paid by 1 June 2013. The final four instalments, each of £1.625 million, must then be paid by 1 March 2014, 1 June 2014, 1 September 2014 and 1 December 2014 respectively.”

CPP may not be the same magnitude as the Payment Protection Insurance (PPI) scandal, which is costing the banks around £15 billion. However it does provide further evidence that PPI was not an aberration - just part of business as usual in the Financial Services industry. It also shows that the FSA continuous to be the pusillanimous poodle it never ceased to be.