24 Feb, 2016
Pension reform could trigger wave of mis-selling claims
George Osborne’s pension reforms could trigger the next major wave of mis-selling claims, according to a report by the public spending watchdog. The National Audit Office (NAO) has highlighted concerns that freedoms introduced last April, which allowed pensioners to cash in their savings, could lead to widespread exploitation.
However, the NAO also highlighted the enormous cost of the payment protection insurance scandal. Auditors have calculated that compensation totalling £22.2bn has been paid over nearly five years of the PPI fracas.
The organisations responsible for overseeing the financial services industry; the Financial Conduct Authority (FCA), the Financial Ombudsman Service and Financial Services Compensation Scheme, cost £834m to run, but mis-selling remains a “major problem”, the NAO report said.
The report highlights a warning made by the FCA that changes to pension policy introduced by the government raise risks that “vulnerable and unsophisticated” consumers could take financial decisions that are not in their best interests.
Since April, a flood of savers have cashed in their retirement money, with more than 200,000 people accessing their pension pots during the first three months of the scheme. While fines appear to have substantially reduced financial incentives for firms to mis-sell, the complexity of products, sales incentives and company cultures mean the risks remain.
The NAO also found the FCA “lacks good evidence” on whether its actions were reducing overall levels of mis-selling. Customers wrongly sold PPI can put in a submission for compensation directly for free but many used claims management companies instead.
The firms are estimated to have taken between £3.8bn and £5bn of the PPI compensation paid between April 2011 and November 2015, the NAO said.
Complaints to the ombudsman about PPI are taking three times as long to handle as they did in 2011-12 as it struggles to deal with an unprecedented increase in its workload. The body has a backlog of 40,000 cases that are still outstanding after two years, which it does not expect to clear until July 2017.
Banks have a poor record of dealing with complaints and the level upheld by the ombudsman has remained consistent over the past five years, the NAO found. Sir Amyas Morse, head of the NAO, said that because of legal restrictions, auditors could examine only limited information at the FCA. He added that they remain concerned by its actions.
“The information my staff could see, such as customer complaints, does not show any clear reduction in the extent of mis-selling. The FCA cannot be confident that its actions are reducing the overall level of mis-selling, and it has further to go to show it is achieving value for money,” he said
A spokesperson for the FCA said the body welcomed the report and it would accept the NAO’s findings to increase confidence for consumers. “Protecting consumers from the effects of mis-selling is central to what we do.”
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