WIREDGOV

The Financial Services Authority (FSA) has fined HFC Bank Ltd (HFC) £1,085,000 for failing to take reasonable care to ensure that the advice it gave customers to buy Payment Protection Insurance (PPI) was suitable, and for failing to have adequate systems and controls for the sale of PPI.

From January 2005 to May 2007, HFC's procedures did not require advisers in its branch network to gather sufficient information about customers' circumstances and take sufficient information into account when considering whether PPI was suitable. HFC also did not require advisers to explain fully why they recommended a particular policy or identify to customers any demands and needs which the policy would not meet. These and other failings meant that HFC put its customers at an unacceptable risk of being sold PPI when it was not suitable for them.

FSA Director of Enforcement Margaret Cole said:

"We are determined to see much better practice in the PPI market. We announced in September that we would be imposing higher fines for serious failings in the retail market including against firms who fall short in relation to PPI. The fine against HFC – the biggest PPI fine to date and first since our September announcement – is evidence of our determination in this area. HFC's failings put its customers at risk of buying unsuitable protection insurance and the financial impact on them of unsuitable advice was likely to be significant."

In addition, the FSA found that as a result of HFC’s inadequate systems and controls:

• it did not have effective systems to train and monitor its staff and failed to ensure that its procedures for monitoring sales staff effectively identified and investigated potentially unsuitable sales;
• management information provided to HFC's senior management was not sufficient to enable them to identify problems with the sale of PPI; and
• its records were not sufficient to demonstrate its sales were suitable.

HFC's branch network (136 branches as at May 2007) provides secured and unsecured loans and sells PPI on an advised basis in connection with those loans. Between January 2005 and May 2007 HFC sold PPI with 75% of the loans it provided, totalling 163,000 PPI policies (of which 124,000 were single premium policies sold with unsecured loans). HFC's customers largely had credit ratings which resulted in them having limited access to consumer finance. Over this period HFC traded under the "Household Bank" and "Beneficial Finance" names.

Following discussions with the FSA, HFC has agreed to implement changes to its sales processes and has committed to a robust remedial action plan, overseen by third party accountants, involving a programme of customer contact and, if appropriate, steps to ensure that its customers are not disadvantaged.

By agreeing to settle at an early stage HFC has qualified for a 30% discount under the FSA's executive settlement procedures – without the discount the fine would have been £1,550,000. The size of the fine reflects the FSA's announcement set out in its PPI thematic update in September 2007 that it would seek to increase the level of fines in PPI cases where this is warranted by the nature, seriousness and impact of the breach and by the likely impact on deterrence.

Notes for editors

1. The full text of the Final Notice dated 16 January 2008, is available on the FSA website. This includes the background to the case, the relevant statutory provisions and the regulatory requirements contravened and the factors taken into account when settling the level of the fine.
2. HFC has been regulated by the FSA since 1 December 2001 , but in relation to its insurance mediation activities, only since 14 January 2005 . It is an authorised person under the Financial Services and Markets Act with permissions to carry out a range of regulated activities.
3. The problems in HFC's sales process were identified by the FSA, and not by HFC's own systems and procedures.
4. HFC was in breach of the FSA's Principles for Businesses 9 and 3:
   
   
   • Principle 9: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
   • Principle 3: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
5. The FSA's follow-up thematic work on the sale of PPI published in September 2007 found improvements in some areas, but also that many firms selling this insurance were still failing to treat their customers fairly.
6. The FSA has previously fined five firms over poor PPI selling practices – Regency Mortgage Corporation Limited £56,000, Loans.co.uk £455,000, Redcats (Brands) Limited £270,000, GE Capital Bank £610,000 and Capital One Bank (Europe) Plc £175,000 – and has imposed a public censure on Eastern Western Motor Group Limited and Cathedral Motor Company Limited. Three other cases have been concluded where problems relating to PPI also featured - Capital Mortgage Connections Limited £17,500, Home and County Mortgages Limited £52,500 and Hadenglen Home Finance Plc (£133,000 for the firm and £49,000 for its chief executive).
7. The FSA has introduced additional rules in its Insurance Conduct of Business Rulebook designed to improve PPI selling practices.
8. To help consumers make informed decisions, the FSA's consumer website includes questions that people should ask themselves before taking out PPI.
9. The FSA is planning to introduce in spring 2008 a new comparative information table for PPI on its Consumer Website.
10. The Competition Commission is currently conducting a market investigation into the PPI market.
11. The FSA regulates the financial services industry and has four objectives under FSMA: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
12. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.