August 22, 2013 10:33 am

FCA says third party not needed in £1.3bn mis-selling redress scheme

UK regulators are trying to keep claims management companies out of the latest compensation drive for victims of financial services mis-selling, which could lead to £1.3bn being handed back to credit card holders.

The Financial Conduct Authority on Thursday said 7m customers of CPP – a credit card insurer that covered identity theft and other risks – would soon be sent a letter informing them of a redress scheme that it had set up with industry co-operation.

CPP was fined £10.5m in November by the FCA’s predecessor body, the Financial Services Authority, for persuading customers to buy insurance cover that they already had, as well as overstating the risk of identity theft.

The FCA confirmed on Thursday that it had struck a deal with CPP and 13 high street banks and credit card issuers to pay up to £1.3bn in compensation to CPP customers.

The banks and credit card issuers are on the hook because they introduced millions of people to CPP, whose shares plunged 17 per cent to 16.75p in morning trading on Thursday in the wake of the announcement.

The regulator stressed that customers seeking redress did not need to use a claims management company – a third party that handles compensation requests on behalf of individuals.

Such intermediaries have played a controversial role in the clean-up of the much larger scandal involving payment protection insurance mis-selling, with financial institutions accusing them of pursuing bogus or duplicate claims.

The groups funding the compensation are: Bank of Scotland, part of Lloyds Banking Group; Barclays; Canada Square Operations, formerly Egg Banking; Capital One; Clydesdale Bank; Home Retail, owner of the Argos store chain; HSBC; MBNA; Morgan Stanley; Nationwide Building Society; Santander; Royal Bank of Scotland; and Tesco. The FCA would not say how much each company would contribute.

The compensation scheme is open to all those who bought or renewed CPP’s card protection product since January 14 2005, either directly from the company or through a bank or card issuer participating in the redress exercise.

The product went under various names, such as HSBC’s Card Guard, Barclaycard Card Protection and Egg Emergency Cover. It cost about £30 per year. The scheme is also open to those who bought or renewed CPP’s £80-a-year identity protection cover by telephone from CPP during that period.

The letters will be sent out by CPP from August 29. If customers are due compensation, they will be refunded all money spent on their policy since January 14, 2005, less any sums paid out, plus 8 per cent interest on the amount owed.

In a highly unusual move, the compensation exercise is being structured as a “scheme of arrangement”, something that is commonly used in debt restructuring.

One quirk of this approach is that CPP customers will be asked to vote on whether they approve of the scheme. The need to hold a vote and then secure High Court approval means that compensation is not expected to be paid until spring 2014.

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History of scandals

Credit card insurance – mid 2000s-2013: estimated compensation £1.3bn
Customers bought credit card and identity theft protection for values up to £100,000 from a “life assistance” company called CPP, writes Alastair Hewet. Such protection however, was already provided by the banks.

Interest rate swaps – 2001-13: compensation £1bn-£2bn
The small businesses at the heart of the scandal were sold derivatives, usually in conjunction with some sort of floating rate business loan. Most were simple swaps linked to UK interest rates. The business paid a fee, or ongoing fees, for protection that the interest on their loan would not rise above a particular level, no matter what the Bank of England did. This protection generally proved unnecessary because rates have stayed low but customers faced substantial penalties for cancelling the agreements

PPI – early 2000s-2012: compensation £15bn
Payment protection insurance was sold to consumers when they took out personal loans or mortgages. Millions of people bought it either unwittingly or without ever being able to claim on it.

Split Capital Investment Trusts – 1990-2007: compensation £144m
Stock market listed funds that hold portfolios of securities but issue different classes of share, entitling investors to different types of return. Sold as low-risk investments but collapsed amid the dotcom crash.

Personal Pensions – late 1980s to early 1990s: compensation £11bn
Financial advisers persuaded more than 2m people to switch from their company pension scheme to a personal pension that was based on stock market performance.

Endowment Mortgages – 1980s to early 1990s: compensation £1bn
Borrowers took out interest-only mortgages and paid into a pension or endowment policy to pay off the principal. This underpinned many home loans but some endowment mortgages undershot investment targets.

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