UK faces 'serious risk' of new financial mis-selling scandal, say MPs

The British financial services industry faces “serious risks” of another mis-selling scandal, with new pension reforms identified as potential trigger by a powerful parliamentary committee.

In a report on the payment protection insurance (PPI) mis-selling outrage that has seen more than 12m consumers receive £22bn in compensation since April 2011, the all-party Public Accounts Committee said there was still no indication that the culture of profit making with no regard for regulations within the banking sector had changed.

The committee also said that claims management firms had managed to earn £5bn in fees – cash that should have been paid to consumers. It described this as a "a failure of the system of regulation and redress".

While it is "straightforward and free" for affected consumers to claim compensation, in 2014-15 80% of complaints to the Ombudsman about PPI were made through claims management companies.

“Departments and regulators have been far too passive in allowing this to happen,” the committee said.

"In many cases, these companies merely package up payment protection insurance claims, but they typically charge between a quarter and a third of any compensation subsequently paid…the public bodies involved have been too slow in taking responsibility for this situation, and too passive in allowing it to happen.”

The Financial Conduct Authority and Treasury needed to "do more to know how much mis-selling is happening now, and which regulatory activities work best to prevent it".

In a controversial move, the FCA last year said it was pulling out of a planned review of banking culture, despite identifying it as a key area of focus for 2016.

Finance Minister George Osborne was accused of putting the regulator under pressure to drop the probe as part of a general government policy of taking a less rigorous approach to banks whose behaviour plunged the global economy into recession in 2008. The taxpayer was forced to spend billions propping up the sector.

"The FCA has withdrawn a planned review of banks' culture, but has not articulated what culture it expects firms to have. There is no guarantee that any improvements in cultures will stick as the regulatory spotlight moves away," the committee said.

It called on the FCA to "outline the actions it will take to improve cultures in financial services firms, and report to us on their effectiveness in a year's time".

The government last year relaxed pension rules to allow consumers to access 25% of their savings pot tax-free at age 55. Industry observers fear this will unleash a wave of fraudsters on an unsuspecting consumer base. Even Work and Pensions Sectretary Steve Webb admitted last year that he had been cold-called by scammers.

"A lot of people will have access to a lot of money come April, and there's a bunch of crooks out there," he said at the time.

Committee chief Meg Hillier said the fallout of the PPI scandal said many consumers were still waiting for a decision on compensation and the Financial Ombudsman needed to work faster to clear the claims backlog.

“The fall-out is still with us. Many people have waited years for a decision on compensation and, because of the way they have pursued their claims, even then they may not receive the full amount. Serious risks of further mis-selling remain,” she said.

“We heard evidence of some diverse causes for products being mis-sold, ranging from incompetent or intimidating sales teams to badly designed and poorly targeted products.”

“It is deeply worrying that while the FCA has taken some action to deal with these causes, it has since scrapped plans for a review of banks’ culture—this despite it being best placed in the system to conduct such a review. This sends a confused message to taxpayers and will do little to reassure potential customers.”