RBS 2012 Annual Report Download - page 461

RBS GROUP 2012
459
Payment Protection Insurance
The FSA conducted a broad industry thematic review of Payment
Protection Insurance (PPI) sales practices and in September 2008, the
FSA announced that it intended to escalate its level of regulatory
intervention. Substantial numbers of customer complaints alleging the
mis-selling of PPI policies have been made to banks and to the Financial
Ombudsman Service (FOS) and many of these are being upheld by the
FOS against the banks.
The FSA published a final policy statement in August 2010 imposing
significant changes with respect to the handling of complaints about the
mis-selling of PPI. In October 2010, the British Bankers’ Association
(BBA) filed an application for judicial review of the FSA’s policy statement
and of related guidance issued by the FOS. In April 2011 the High Court
issued judgment in favour of the FSA and the FOS and in May 2011 the
BBA announced that it would not appeal that judgment. The Group then
reached agreement with the FSA on a process for implementation of its
policy statement and for the future handling of PPI complaints.
Implementation of the agreed processes is currently under way.
Following agreement with the FSA in 2011, the Group increased its
provision of £215 million at 31 December 2010 by £850 million in respect
of PPI. In 2012 a further provision of £1,110 million was recorded. This
strengthened the cumulative provision for PPI to £2.2 billion, from which
£1.3 billion in redress had been paid by 31 December 2012.
Personal current accounts
In July 2008 the OFT published a market study report into Personal
Current Accounts (PCAs) raising concerns as regards the way the market
was functioning. In October 2009 the OFT summarised initiatives agreed
with industry to address these concerns. In December 2009, the OFT
published a further report in which it stated that it continued to have
significant concerns about the operation of the PCA market in the UK, in
particular in relation to unarranged overdrafts, and that it believed that
fundamental changes were required for the market to work in the best
interests of bank customers. In March 2010, the OFT announced that it
had secured agreement from the banks on four industry-wide initiatives
designed to address its concerns, namely minimum standards on the
operation of opt-outs from unarranged overdrafts, new working groups on
information sharing with customers, best practice for PCA customers in
financial difficulties and incurring charges, and PCA providers to publish
their policies on dealing with PCA customers in financial difficulties. The
OFT also announced that it would conduct six-monthly reviews and would
also review the market again fully in 2012 and undertake a brief analysis
on barriers to entry.
The first six-monthly review was completed in September 2010. The OFT
noted progress in switching, transparency and unarranged overdrafts for
the period March to September 2010 and highlighted further changes it
wanted to see in the market. In March 2011, the OFT published the next
update report in relation to PCAs. This noted further progress in
improving consumer control over the use of unarranged overdrafts. In
particular, the Lending Standards Board had led on producing standards
and guidance to be included in a revised Lending Code. The OFT stated
it would continue to monitor the market and would consider the need for,
and appropriate timing of, further update reports in light of other
developments, in particular the work of the UK Government’s
Independent Commission on Banking (ICB).
Additionally, in May 2010, the OFT announced its review of barriers to
entry. The review concerned retail banking and banking for small and
medium size enterprises (SMEs) (up to £25 million turnover) and looked
at products which require a banking licence to sell mortgages, loan
products and, where appropriate, other products such as insurance or
credit cards where cross-selling may facilitate entry or expansion. The
OFT published its report in November 2010. It advised that it expected its
review to be relevant to the ICB, the FSA, HM Treasury and the
Department for Business, Innovation and Skills and to the devolved
governments in the UK. The OFT did not indicate whether it would
undertake any further work. The report maintained that barriers to entry
remain, in particular regarding switching, branch networks and brands. At
this stage, it is not possible to estimate the effect of the OFT’s report and
recommendations regarding barriers to entry upon the Group.
On 13 July 2012, the OFT launched its planned full review of the PCA
market. The review was intended to consider whether the initiatives
agreed by the OFT with banks to date have been successful and whether
the market should be referred to the Competition Commission (CC) for a
fuller market investigation.
The OFT’s PCA report was published on 25 January 2013. The OFT
acknowledged some specific improvements in the market since its last
review but concluded that further changes are required to tackle ongoing
concerns, including a lack of switching, the ability of consumers to
compare products and the complexity of overdraft charges. However, the
OFT recognises that a number of major developments are expected over
the coming months including divestment of branches and improvements
in account switching and assistance to customers to compare products
and services. Therefore the OFT has provisionally decided not to refer
the market to the CC at this stage but expects to return to the question of
a referral to the CC in 2015, or before. The OFT also announced that it
will be carrying out behavioural economic research on the way
consumers make decisions and engage with retail banking service, and
will study the operation of payment systems as well as the SME banking
market.
At this stage it is not possible to estimate the effect of these OFT reviews
which may be material.
Private motor insurance
In December 2011, the OFT launched a market study into private motor
insurance, with a focus on the provision of third party vehicle repairs and
credit hire replacement vehicles to claimants. The OFT issued its report
in May 2012 and advised that it believed there were features of the
market that potentially restrict, distort or prevent competition in the market
meriting a referral to the CC. On 28 September 2012 the OFT referred
the private motor insurance market to the CC for a market investigation.
The CC has until 27 September 2014 to publish its findings. At this stage,
it is not possible to estimate the effect the market investigation may have
on Direct Line Insurance Group plc.