The FCA has fined Liberty Mutual Insurance Europe SE ("Liberty") £5,280,800 for its oversight of its mobile phone insurance ("MPI") claims and complaints handling processes administered through a third party (the "Third Party") from 5 July 2010 to 7 June 2015.
Liberty entered into arrangements with the Third Party to provide MPI to retail customers with Liberty receiving a fronting fee. All administrative functions associated with the MPI (in particular claims and complaints handling) were managed by the Third Party.
In 2013 the FCA published a Thematic Review setting out its expectations for the MPI market and followed this up with a further review in December 2015. The referral of Liberty to FCA Enforcement arose from this thematic review.
The FCA found that Liberty's customers were exposed to the possibility that their claims and complaints would not be handled fairly. In particular, the FCA considered that during the relevant period some claims were unfairly declined or not investigated adequately and that Liberty did not have in place adequate systems and controls to oversee the activities of the Third Party.
According to the FCA, some customers of Liberty were exposed to unfair treatment, in particular:
- Customers were denied cover for claims for loss or theft if they failed to comply with a condition of the policy which required a recovery and location app to be downloaded on the phone.
- Claims were denied for suspicion of fraud where there was insufficient evidence to support the decision.
- The insurer unfairly relied upon a policy exclusion for unattended loss, rejecting claims where it could not show that the customer had acted recklessly or deliberately.
- Many customers who complained about denial of cover had the original decision overturned, creating what the FCA described as a "de facto two-stage claims process, which risked causing unfair outcomes for customers."
- Complaints of customers were dismissed without adequate investigation.
Overall the FCA reported that around 23,505 of Liberty's 2.6 million MPI customers (around 0.9%) were affected.
In addition to the specific findings around claims and complaints handling, the FCA determined that Liberty's systems and controls for managing the outsourced functions were ineffective for a number of reasons including:
- Liberty did not fully understand the Third Party's business model including its claims and complaints processes until June 2015.
- Liberty failed properly to follow up circumstances where the Third Party provided information to it which was insufficiently detailed or inadequate for the purpose of monitoring.
This case is another example, of enforcement following failures in outsourced functions, like the cases featured in previous Enforcement Watch editions against Raphaels Bank and Interactive Brokers.
The cases are an important reminder that whilst firms can outsource and delegate the day to day performance of key functions, the firm retains ultimate regulatory responsibility when things go wrong.Where the FCA finds that there are systemic failures in the outsourced function, it will be very difficult for a firm to escape a finding that it also failed to have appropriate systems and controls in place when setting up, managing or monitoring the outsourced function.
An interesting feature of this case is the FCA's attitude to one aspect of the Third Party's complaints handling. Regulated firms faced with customer complaints may sometimes consider it expedient to accede to customer complaints for commercial reasons. For example, firms may consider the cost of investigating a complaint outweighs the costs of redress. Firms will also have an understandable desire to maintain customer goodwill. According to the Final Notice, the Third Party took such an approach in this case.
However, the FCA found that this created a "two-stage" claims process, where those who complained were far more likely – and in some cases, certain – to have their claim upheld. In the FCA's view this was unfair. Paradoxically, this suggests that in some cases it may be "fairer" for firms to stick to their guns and turn down complaints rather than risk creating such a "two-stage" claims process.
Firms which are tempted to accede to customer complaints for "commercial reasons" need to take great care. In accordance with DISP 1.6.2 they should offer redress or remedial action on a good-will basis whilst making clear that they do not accept the complaint. Where a firm receives a large number of complaints about the same issue and finds itself offering good-will redress to all or substantially all complainants, the firm should consider whether it should also revisit decisions taken against similar customer who have not chosen to complain.
In calculating penalty against Liberty, the FCA decided to apply its penalty formula based upon a percentage of the entire MPI gross written premiums (revenue) during the relevant period. This is a different approach from that taken by the FCA in other claims or complaints handling cases. For example when fining CT Capital, Lloyds Bank and Clydesdale for PPI claims mishandling, the penalties were based upon a percentage of the potential redress payable to the customer population whose complaints were rejected by the firm. Had the FCA applied the same formula here it would have fined Liberty a significantly lower amount - around £250,000.
Liberty can however take some comfort from the fact that the FCA took into account its proactive approach to remedying issues when discovered and the generous redress it paid to customers. The FCA said that this reduced the seriousness of the breaches from level 3 to level 2 and had the effect of chipping off £2.64m from the penalty which would otherwise have been paid at level 3.