On 22 August 2017, Vanquis Bank Limited ("Vanquis") confirmed that it was co-operating with an investigation by the Financial Conduct Authority ("FCA") into the sale of one of its credit card add-on products: the Repayment Option Plan ("ROP").1 Six months later, on 27 February 2018, the FCA published a Final Notice announcing the results of its investigation.2
The FCA found that Vanquis's sale of the ROP had, in breach of Principles 6 and 7 of the FCA's Principles for Businesses ("PRIN"), failed to treat customers fairly or pay due regard to their information needs. This was due to the fact that Vanquis failed adequately to notify customers that the ROP, which incurred a monthly fee proportionate to an account's balance, was treated as a purchase transaction. This meant that the premium that Vanquis charged also attracted interest unless it was paid off by the due date.
Although the financial penalty of £1.976 million was not particularly significant, it was merely the tip of the iceberg. Vanquis was required to make a further £11.876 million in restitution to customers affected by the breaches. Not only that, Vanquis also agreed to pay £168.781 million in voluntary restitution to all customers who purchased the ROP before the FCA assumed responsibility for consumer credit activities on 1 April 2014.
Here are a few lessons we can take from the FCA's action.
The ROP
Since its inception in 2003, Vanquis has offered credit cards to customers with poor credit histories, enabling them to build or rebuild their credit. The ROP has been a very popular add-on, providing customers with a suite of benefits designed to address specified financial circumstances:
- Account freezes in the event of (among other events) illness, accidents or unemployment, enabling customers to freeze their account for up to two years;
- Payment holidays that allowed customers to choose not to make their monthly repayment once every 12 months;
- A feature called "Lifeline" that Vanquis activated automatically if a customer did not make their minimum monthly repayment by the due date (the feature could only be activated once a year and exempted the customer from fees that would have resulted from their late payment); and
- SMS services whereby Vanquis texted customers with monthly payment due reminders and near limit/over limit alerts.
The full ROP plan cost customers £1.29 per £100 or 1.29% of the outstanding balance on their account each month. Crucially, the charge was treated as a purchase transaction, meaning that it attracted interest at the applicable APR (which varied from 19.9% to a hefty 79.9%). Given the relatively high APR applicable to many customers' Vanquis cards, the interest payable on an ROP charge could have been significant.3
Customer communications
Vanquis sold the ROP to existing customers on a non-advised basis by telephone, offering the product at various stages in the customer journey. As with many credit/debit card add-on products (for example, fraud and identity protection or travel and gadget insurance), the initial offer often took place when customers called to activate their card; sales agents giving customers the opportunity to "opt in" to the ROP. Vanquis also made outbound calls to existing customers with the same offer if they had not already opted in at the activation stage.
Having reviewed Vanquis's sales call scripts, the FCA found that they "did not provide customers with adequate information about interest incurred on ROP charges at the point of sale." Moreover, in none of the 40 audio recordings of sales calls sampled by the FCA did the agent "explain to customers that if they incurred an ROP charge on an unpaid balance, interest would be charged on the outstanding ROP balance in addition to interest being charged on any purchases they had made."
Once customers purchased the ROP, they received a welcome pack enclosing the product's full terms and conditions ("T&Cs"). The FCA also took umbrage at these T&Cs and the welcome pack, concluding that although they included a term to the effect that the ROP could incur interest at the card rate:
...the Authority does not accept that the provision of the terms and conditions could ever be sufficient to fulfil Vanquis' obligations to provide its customers with adequate information about the ROP when it was sold to customers on the sales call. Customers may not have been aware of the ROP on receipt of the terms and conditions and Vanquis had not introduced customers to the ROP at that point.4
The FCA therefore held that Vanquis's communications were not "fair, clear and not misleading", in breach of PRIN 7. Without vital information about the ROP, customers could not make an informed decision as to whether or not to purchase the product. In addition, the FCA stated that "the cost of the ROP and the interest charged on the ROP (which was compounded) may have contributed to customers not reducing their balance if they only made their minimum payment."5
Non-advised sales
The FCA's assessment is a helpful reminder that the requirement to communicate in a fair, clear and not misleading manner does not simply apply to advised sales (i.e. where firms make personal recommendations). It applies to non-advised sales as well.
Customer detriment
The Final Notice excerpts quoted above also demonstrate that the FCA can take action even if customer detriment has not been conclusively proved (note the statements that customers "may not" have been aware of the ROP and that the ROP "may have" contributed to customers not reducing their credit card balance). It is enough for the FCA to deem detriment likely.
Beyond financial penalties
Financial penalties, although a popular enforcement tool, are by no means the FCA's only recourse.
Section 384(1) of the Financial Services and Markets Act 2000 ("FSMA") provides that if the FCA is satisfied that a person has contravened a relevant requirement (in this case PRIN 6 and 7), and that profits have accrued to it as a result of the contravention or one or more persons have suffered loss or otherwise adversely affected, it can require the person concerned to make restitution.
In the Vanquis case, the FCA compelled the bank to make good estimated losses of £11.876 million, being the interest charged on the ROP during the relevant period, which ran from 1 April 2014 (when the FCA began to regulate consumer credit).
Beyond FCA regulation
The FCA could not, however, compel Vanquis to make restitution in respect of interest charged prior to that point. Vanquis nevertheless agreed to voluntary payments dating as far back as 2003, when the product was first introduced.
Interestingly, Vanquis's agreement is in contrast to recent insurance add-on redress schemes, which have provided compensation in respect of sales and renewals dating back to 14 January 2005 (the date on which the FCA began regulating the sale of general insurance products). This may be explained by the fact that prior to the FCA assuming general insurance regulation, the sector was governed by voluntary codes. Consumer credit was, however, under the auspices of the Office of Fair Trading, which, though notoriously hands-off, ostensibly required businesses to deal fairly with their customers. The fact that the FCA has only regulated consumer credit for four years, as opposed to 13 in the case of general insurance, may also have been a distinguishing factor.
Complaints
The Final Notice makes no mention of Vanquis's complaints data in respect of the ROP. Complaints are, however, a vital metric for discerning whether a firm's products and its sales and after-sales processes are functioning well. This includes complaints handled by the firm's internal processes, as well as complaints referred to the Financial Ombudsman Service.
Focus on retail issues
After an almost constant stream of wholesale banking scandals (including headline-grabbing fines for LIBOR and foreign exchange manipulation), the action against Vanquis is a timely reminder that the FCA is still very much focused on protecting retail customers' interests. In fact, this is the latest in a series of retail mis-selling cases that the FCA has pursued in recent years. These have resulted in substantial redress schemes compensating millions of customers.
The FCA has also recently published a number of papers, including "Dear CEO" letters, thematic reviews, policy statements and guidance papers, on a wide range of retail issues, including: the provision and distribution of contracts for difference products6; product governance in small and medium-sized retail banks7; customers' understanding of retail banking products8; and perimeter guidance on personal recommendations on retail investments9.
With retail banking, lending and investments identified as "sector priorities" in the FCA's Business Plan 2017/201810, we can certainly expect this trend to continue. Firms would be well-advised to take note.
Footnotes
1 Available at: https://www.providentfinancial.com/media/newsroom/2017/disruption-to-home-credit-trading/
2 Available at: https://www.fca.org.uk/publication/final-notices/vanquis-bank-limited-2018.pdf
3 For example, if a customer were to have had a balance of £1,000 on their credit card, the full ROP charge for that month would have been £12.90. Taking the APR range indicated in the Final Notice, interest on that ROP charge could have been anything between £2.57 and £10.31 (the aggregate amount would then have been compounded month on month).
4 Paragraph 4.9 of the Vanquis Final Notice
5 Paragraph 4.24 of the Vanquis Final Notice
6 Available at: https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-cfd-review-findings.pdf
7 Available at: https://www.fca.org.uk/publications/multi-firm-reviews/retail-banking-product-governance-review
8 Available at: https://www.fca.org.uk/publication/thematic-reviews/tr17-1.pdf
9 Available at: https://www.fca.org.uk/publication/policy/ps18-03.pdf
10 Available at: https://www.fca.org.uk/publication/business-plans/business-plan-2017-18.pdf
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