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What to do about financial Velociraptors? Barclays Final Notice and FCA Regulation

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Iain Ramsay

http://www.kent.ac.uk/law/people/academic/Ramsay,_Iain.html

            Last week the FCA imposed a fine of £26 million on Barclays for several contraventions of its regulatory obligations to treat fairly customers in financial difficulty (see here). This is the largest fine imposed for breach of its consumer credit rules. At least 1.5  million customers were affected and Barclays has paid out £273 million in redress.      

The case raises broader questions about regulation of large financial institutions. It suggests that  problems similar to those which created the Payment Protection Insurance scandal in the early 2000s continue to exist within some financial institutions. I take the term velociraptor from Stella Creasey’s intervention on the passage of the current Financial Services Bill (see here) where she likened some financial institutions to the velociraptors of Jurassic Park and their ability to evolve to kill, suggesting an “evolution to exploit” in the case of the financial institutions (see here). Her solution was more effective ex ante regulation, rather than consumers having to obtain ex post redress through the Financial Ombudsman Service.

         The Barclays case entailed the application of FCA high-level principles and rules. Under the high level principles (here col 362) Barclays must meet  general principle 6: a firm must pay due regard to the interests of its customers and treat them fairly. This principle- based approach was introduced in the early 2000s by the then Financial Services Authority as an alternative to detailed regulation, so that firms would be assessed on their ability to meet fair outcomes for consumers by building fairness into corporate culture.  Consumers should be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. This should be reflected in the firms leadership, strategy, decision-making, controls, recruitment, training and competence, and reward systems.

               The failure of many firms to achieve fair outcomes became clear in the Payment Protection Insurance debacle where firms generally failed on most aspects of company culture, with individual employees for example being under substantial  pressure to meet sales targets for selling insurance add-on products, and little effective oversight of sales, so that many consumers were put at an unacceptable risk of being sold inappropriate or unneeded insurance products on credit.  The ultimate bill paid by financial institutions in redress for PPI is over £40 billion.

      In addition to the general duty to treat customers fairly firms must also follow FCA rules. They  require a firm to monitor a customers repayment record and take appropriate action where there are signs of actual or possible repayment difficulties (see here CONC 6.7.2R). A firm must have appropriate policies and procedures for dealing with customers who fall into arrears and for those who it reasonably suspects to be vulnerable (e.g. those with mental health difficulties) (see here CONC7.2.1R). Firms must treat those in arrears difficulties with  forbearance and due consideration which might include e.g. suspending, reducing, waiving or cancelling any further interest or charges, allowing deferment of payment of arrears or accepting token payments for a reasonable period of time in order to allow a customer to recover from an unexpected income shock or from a customer who demonstrates that meeting the customers existing debts would mean not being able to meet the customers priority debts or other essential living expenses (see here CONC 7.3.4R).

          The Final Notice in the Barclays case indicates a failure to meet the above norms and indeed similar internal failures to the PPI debacle. Thus Barclays knew when it applied for full authorisation  from the FCA in 2015 (after consumer credit regulation was transferred from the Office of Fair Trading to the FCA) that there were problems in its debt collection system: that its collections were “focussed on commercial returns rather than customer outcomes” and that problems in its approach to collections had been identified as early as 2013. Barclays  failed to follow its customer contact policies, or have appropriate conversations with customers to ascertain their financial circumstances. It also offered forbearance solutions that were unaffordable or unsustainable. An internal report in 2015 had identified “a lack of resourcing, inadequate training of staff, cultural issues which did not support good customer outcomes and a lack of controls to enable management to identify and rectify these issues” and a further review of 2017 indicated that Barclays did “ not have effective oversight and supervision over conduct risks arising from customer contact within collections. As a result, the level of customer detriment occurring in [Collections] has remained outside appetite (sic) for over a year.”  A further remediation review occurred in 2017 which found that 25% of “customer journeys” resulted in unfair outcomes requiring some form of remediation.

        Philip Augar in his book on Barclays bank (here) indicates that Barclays was at the forefront of introducing incentives for staff to upsell products such as PPI in the early 2000s, with PPI forming 42 percent of its profits in 2005.  The final notice in the current case makes one wonder how much has changed in Barclays corporate culture, at least in debt collection, since that time.

             The treating customers fairly initiative was intended to achieve effective ex ante regulation by firms embedding norms of good conduct in their internal structures in order to achieve good outcomes for consumers.  The inability of some financial institutions to achieve this suggests challenges for the regulation of corporate behaviour.  If the fines and redress associated with PPI have not changed behaviour then what measures would be appropriate?  

        One wonders if the large financial institutions which dominate the retail credit market in the UK are not merely “too big to fail” but “too big to manage”. Moreover the “corporate culture” may be difficult to change. Many firms could not see the need for change at the time of the PPI scandal since they believed that they treated customers fairly, notwithstanding the prevalence of misselling (see Gilad, 2011, “Institutionalizing Fairness in Financial Markets: Mission Impossible? here ).

        The issues raised here about the most effective form of regulation  are too many to be addressed in a short blog. The call for more effective ex ante regulation is welcome, although similar calls were made after the financial crisis of 2008. Indeed the transfer of consumer credit regulation to the FCA from the OFT in 2014 was intended to result in a more proactive regulation. Yet regulatory arbitrage is historically a central characteristic of consumer credit markets. Should we treat corporations, as Joel Bakan suggests, as ‘psychopaths’, ‘programmed to exploit others for profit’ (see Bakan, here)?  

        Two  final points. The failure of a very large financial institutions to follow the FCA rules on forbearance underlines the need for the legislative  imposition of an extended breathing space for individuals in financial distress. Finally, legal academics still focus much of their attention on case law and the judiciary. Greater attention should be paid to the rules and decisions of bodies such as the FCA which may be often more significant than case law.


1 Comment

  1. […] What to do about financial Velociraptors? Barclays Final Notice and FCA Regulation An academic blog: regulatory arbitrage is historically a central characteristic of consumer credit markets. Should we treat corporations, as Joel Bakan suggests, as ‘psychopaths’, ‘programmed to exploit others for profit’?  […]

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