2 March 2018
Why Vanquis Bank's fine matters to your business
Earlier this week, Vanquis Bank - the sub-prime credit card provider - found itself on the wrong end of a £2m fine from the Financial Conduct Authority. To boot, it has agreed to pay back almost £170m to its customers.
Its transgression involved the sale of an add-on to its cards, which gave customers the chance to miss payments without having their credit file tarnished. While Vanquis disclosed the headline cost of these so-called Repayment Option Plans, it didn't tell customers that interest would be charged on top - the effect of which could be very severe given that Vanquis' cards have APRs of up to 80%.
Given that almost 50% of customers were signed up to the ROP, it became quite a cash cow for Vanquis.
Although large retail fines and compensation packages were all the rage in the naughies, they've been much rarer in recent years. And it's been a while since the FCA has levied a retail fine for misrepresentation of this sort.
Whether you work in banking or insurance, it's well worth understanding the detail of this latest case - as it demonstrates the FCA's willingness to hold companies to account for failing to explain their products properly.
Putting it in the Ts & Cs isn't enough
For me, the most revealing part of the FCA's final notice to Vanquis is its explicit statement that flagging onerous features in the terms and conditions alone simply isn't enough.
Here's how the FCA puts it:
"Whilst the terms and conditions included a term to the effect that the ROP was a purchase transaction which could incur interest at the card rate, and the same information was provided in the customer "Welcome Pack", 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." (That's a 78 word sentence by the way - the FCA could do with some help with its copywriting).
In this case, the true cost of the product wasn't being explained. And if it had, it may well have affected the customers' decision to buy it.
The right information at the right time
The same principle applies across the financial services industry. Customers need to be given as much information as possible to ensure they can make an informed decision.
Many companies get this - but struggle to get the balance right between frictionless purhcase or sales processes, and setting customer expectations appropriately.
But other firms still willfully try to withhold information from customers, taking advantage of their inertia or ignorance to complete a sale.
Renewal letters in the insurance sector are a good example of this. Until the regulator stepped in last year, almost no businesses told customers how much they'd paid the previous year, when they wrote to ask them to renew.
And even since they were mandated to do this by the regulator, many still try to find ways of obscuring the true picture - either by using small fonts, or giving the information over in a way that is not directly comparable.
In the transparency analysis that we carry out for our customer experience ratings, we come across dozens of these micro conduct failures. At first glance, none of them look too serious. But if they amount to tens of millions of pounds of extra revenue over a period of years - revenue that may not have come in the door if customers had understood the whole story - then don't be surprised if the FCA comes knocking at the door.
How much do insurers charge customers to pay by the month? When do you get a courtesy car when you make a claim on your car insurance? How many payments to do you have to miss before you lose your 0% offer on your credit card? What's the maximum interest rate you could end up being charged when you apply for a personal loan?
These are just a handful of examples of things where numerous companies continue to fall short. It's all there in the Ts & Cs - but not flagged clearly to customers before they commit to an application or purchase.
The bar is about to be raised
The principles of regulation already talk about having due regard to the customers' interests, and the need to provide adeuqate information.
But in the insurance sector, the bar will be raised even further in October, when the Insurance Distribition Directive comes into force. This stipulates that companies must work in their customers' best interests - a test that I'm not sure many would pass at the moment.
In banking, there continues to be a move towards the introduction of a duty of care - which would amount to the same thing.
Companies should be reviewing every step of their sales and purchase journeys as well as their literature to ensure they meet these new higher standards. Being dragged through enforcement is not just bad for your brand, it's bad for the reputation of the whole industry.
And there are clear reasons to do this beyond damage limitation. Setting expectations clearly gives you a much better chance of pleasing your customers. If people feel they are being treated honestly, and their bank or insurer has nothing to hide - they are much more likely to stay put, even if that means paying a little more than they might if they switched.
So one final question: can you be sure that your company won't be the next one to be made an example of?