FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this Final Notice, the Authority hereby imposes on
Clydesdale Bank PLC (“Clydesdale”) a financial penalty of £20,678,300.

1.2.
Clydesdale agreed to settle at an early stage of the Authority’s investigation.
Clydesdale therefore qualified for a 30% (Stage 1) discount under the Authority’s
executive settlement procedures. Were it not for this discount, the Authority
would have imposed a financial penalty of £29,540,500 on Clydesdale.

2.
SUMMARY OF REASONS

2.1.
On the basis of the facts and matters described below, Clydesdale breached
Principle 6 (Customers’ interests) of the Authority’s Principles for Businesses
between 10 May 2011 and 30 July 2013 (“the Relevant Period”) in relation to
handling complaints from its customers who had purchased Payment Protection
Insurance (“PPI”).

2.2.
PPI complaint handling is a high priority issue for the Authority. Making sure
customers previously mis-sold PPI are treated fairly now, and paid redress where
it is due, is an important step in rebuilding trust in financial institutions. The
Authority has made numerous statements raising concerns about the issues

around the sale of PPI to customers and the appropriate redress that should be
paid to customers where PPI was mis-sold. These should have been reflected in
Clydesdale’s complaint handling processes to ensure that PPI customers who
complained were treated fairly.

2.3.
During the Relevant Period:

(1)
Clydesdale implemented an inappropriate policy which meant that its
complaint handlers would not search for any documents relating to PPI
complaints about loans and mortgages which had been repaid more than
seven years prior to the date of the complaint, on the basis that the
documents fell outside Clydesdale’s seven year document retention period.
This was despite the fact that, in a small percentage of cases, relevant
documents had not in fact been destroyed and were still readily available
on Clydesdale’s electronic systems. The Authority makes no criticism of
the document retention period itself;

(2)
Clydesdale implemented another inappropriate policy which meant that,
when calculating redress for credit card PPI complaints, complaint handlers
would not consider credit card statements that pre-dated the year 2000, or
take steps to estimate the PPI payments made before that date. Credit
card statements were available, albeit with large gaps, for some of the
period pre-dating the year 2000, but the statements were held in
microfiche rather than electronic form and were therefore not easily
retrievable;

(3)
a team within Clydesdale’s PPI complaint handling operation adopted a
practice between May 2012 and June 2013 of providing false information
to the Financial Ombudsman Service (“the ombudsman service”). This
information was provided in response to requests from the ombudsman
service for documents evidencing the information Clydesdale held about
the PPI policies sold to individual customers. Specifically, the team:

(a)
altered system print outs relating to loans and mortgages that had
been repaid more than seven years prior to the date of the
complaint, to make it look as if Clydesdale held no relevant loan
documentation when in fact such documents were available (the
Authority considers that this is likely to have affected a small
number of cases); and

(b)
deleted all PPI information from a separate print out listing the
products sold to the customer.

These practices were not known to or authorised by Clydesdale’s
management or PPI leadership team;

(4)
Clydesdale was not transparent with, and in some cases provided
misleading communications to, customers and the ombudsman service
with regard to how complaints affected by the policies described at
paragraphs 2.3(1) and (2) above were dealt with;

(5)
Clydesdale failed to ensure that the complaint handlers responsible for
dealing with complaints referred to the ombudsman service were given
adequate guidance and support;

(6)
Clydesdale failed to ensure that its complaint handlers were appropriately
identifying cases where the PPI policy sold was, or may have been,
unsuitable for the customer; and

(7)
there were deficiencies in Clydesdale’s training and monitoring of
complaint handlers.

2.4.
As a result of the above:

(1)
Clydesdale was not considering all relevant available documents when
deciding whether to reject some loan or mortgage PPI complaints;

(2)
some customers’ complaints were being unfairly rejected;

(3)
Clydesdale was not paying the appropriate amount of redress to some
customers; and

(4)
in some cases, the ombudsman service would have been misled about the
information available to Clydesdale for the purpose of determining the
complaint and/or the redress due to the customer. Customers may
therefore have been disadvantaged. The provision of false information has
also led to delays in the ombudsman service considering complaints while
the inaccuracies in the evidence are resolved.

2.5.
During the Relevant Period, Clydesdale made decisions on approximately 126,600
complaints (13,600 of which were referred to the ombudsman service).
Clydesdale’s conduct meant that up to approximately 42,200 rejected complaints
may have been rejected unfairly, and up to approximately 50,900 complaints that
were upheld may have resulted in inadequate redress for customers. The average
redress paid by Clydesdale to customers on upheld complaints was approximately
£2,897.

2.6.
Clydesdale’s two inappropriate policies described at paragraphs 2.3(1) and (2)
above were implemented early on in the Relevant Period when Clydesdale was
dealing with a backlog of overdue PPI complaints and a high volume of new PPI
complaints. The Authority recognises that firms may want to take steps to make
their PPI complaint handling more efficient and resolve complaints on a timely
basis. However, firms must ensure that the approaches they adopt, and the
decisions they take, do not disadvantage customers.

2.7.
The Authority considers Clydesdale’s failings to be particularly serious for the
following reasons:

(1)
Clydesdale’s FOS PPI team were in some cases providing false information
to the ombudsman service, including by altering documentary evidence to
make it look as if Clydesdale held no relevant documents when in fact
documents were available;

(2)
from 2005 onwards, the Authority has issued guidance identifying issues
around the sale of PPI to customers and the appropriate redress that
should be paid to customers where PPI was mis-sold; and

(3)
the failings resulted in detriment for some customers.

2.8.
In one case, Clydesdale rejected a complaint from a husband and wife who had
taken out single premium PPI on a loan on the basis that it had been repaid more
than seven years prior to the date of the complaint. This was despite the fact that
Clydesdale had not checked whether it held sufficient records to investigate the
complaint. When the complaint was referred to the ombudsman service,
Clydesdale’s FOS PPI team informed the ombudsman service that it had been
unable to trace any documentation. Accordingly, the ombudsman service was
unable to determine the complaint. In fact, Clydesdale did hold sufficient records

to uphold the complaint. Had this information been considered by Clydesdale, or
had the ombudsman service been given accurate information, the customers are
likely to have received compensation of up to £5,100.

2.9.
The Authority recognises that:

(1)
early in the Relevant Period, Clydesdale initiated a review by a professional
services firm (“the professional services firm”) of all aspects of its PPI
complaint handling process, and implemented the recommendations
arising from that review. The review did not highlight issues with the
inappropriate policies referred to above;

(2)
the provision of false information to the ombudsman service was not part
of Clydesdale’s documented procedures or known to Clydesdale’s
management or PPI leadership team. Upon becoming aware of the
relevant practices, Clydesdale took immediate steps to end the practices or
confirm that they had ended, commissioned internal investigations to
investigate the conduct and reported on the outcome of these
investigations to the Authority;

(3)
upon becoming aware of concerns raised by the Authority in mid-2013 with
the way in which historic PPI complaints had been handled, Clydesdale
took prompt steps to change its procedures and enhance its governance
and oversight arrangements in relation to PPI complaints. At the same
time Clydesdale engaged another professional services firm to conduct a
comprehensive review of its PPI complaint handling processes and to
identify which customers had been affected by its failings so that
customers could be contacted and their complaints reviewed appropriately.
The Authority subsequently required this engagement to take place as a
skilled person’s review under s166 of the Financial Services and Markets
Act 2000 (“the Act”);

(4)
Clydesdale has decided to review all PPI complaints handled prior to
August 2014 and will pay appropriate redress to any affected customers.
This process will be overseen by the skilled person; and

(5)
Clydesdale has been open and cooperative with the Authority. After the
referral to Enforcement, Clydesdale agreed a number of facts with the
Authority which has saved the Authority time and resource and enabled
the investigation to be completed in a more efficient and timely manner.

2.10. The total redress for PPI complaints paid to customers by Clydesdale during the

Relevant Period was approximately £149 million. As at 30 September 2014 the
total redress paid by Clydesdale to customers who were mis-sold PPI was £291
million with a total provision of £806 million.

3.
DEFINITIONS

3.1.
The following definitions are used in this Final Notice:

“the Act” means the Financial Services and Markets Act 2000;

“the Authority” means the body corporate previously known as the Financial
Services Authority and renamed on 1 April 2013 as the Financial Conduct
Authority of 25 The North Colonnade, Canary Wharf, London, E14 5HS;

“the Authority’s File Review” means the Authority’s review in April 2012 of files
relating to 46 PPI customers, who had made complaints to Clydesdale between

May 2011 and April 2012, to assess the adequacy of the handling of complaints,
the findings of which were reported by the Authority to Clydesdale in June 2013.
This review was part of a wider thematic review by the Authority into the fairness
of medium-sized firms’ decisions and redress for PPI complaints;

“the Authority’s Handbook” means the Authority’s Handbook of Rules and
guidance;

“BBA” means the British Bankers’ Association;

“BAU PPI team” means the ‘Business As Usual’ PPI complaint handling team in
Clydesdale, which was responsible for handling PPI complaints in the first
instance;

“Business Response Forms” means the forms described in paragraph 4.47 below;

“Clydesdale” means Clydesdale Bank PLC, trading under both the Clydesdale Bank
and Yorkshire Bank brands;

“Clydesdale’s
management”
means
Clydesdale’s
management
senior
to

Clydesdale’s PPI leadership team;

“Clydesdale’s PPI leadership team” or “the PPI leadership team” means the
individuals at Clydesdale with day to day responsibility for overseeing the
activities of Clydesdale’s PPI complaint handling operation;

“credit card policy” means the policy decision approved by Clydesdale in August
2011 which meant Clydesdale would not check any credit card statements dated
before the year 2000 when calculating redress, nor apply any other methodology
to make an assumption about the amount of PPI premium paid before the year
2000;

“DEPP” means the Authority’s Decision Procedure and Penalties Manual which is
part of the Authority’s Handbook;

“DISP” means the Dispute Resolution: Complaints Sourcebook which is part of the
Authority’s Handbook;

“the ombudsman service” means the Financial Ombudsman Service;

“the FOS PPI team” or “Clydesdale’s FOS PPI team” means the team in Clydesdale
with responsibility for dealing with PPI complaints that had been referred to the
ombudsman service, including preparing and submitting information and
responses to the ombudsman service;

“Group” means National Australia Bank Group;

“the Judicial Review” means the Judicial Review proceedings challenging the
Authority’s decision to introduce measures set out in PS10/12;

“policy on loans” means the policy decision approved by Clydesdale in May 2011
which meant Clydesdale would not search for documents relating to loans repaid
or closed more than seven years before the date the PPI complaint was made
(confirmed in March 2012 to include mortgages);

“PPI” means payment protection insurance;

“PPI complaints” means complaints alleging that a PPI policy had been mis-sold;

“Principles” means the Authority’s Principles for Businesses as set out in the
Authority’s Handbook;

“the professional services firm” means the professional services firm engaged by
Clydesdale early in the Relevant Period to carry out a review of all aspects of its
PPI complaint handling, as described at paragraphs 2.9(1) and 4.22;

“PS10/12” means the Authority’s policy statement of 10 August 2010, entitled
“Policy Statement 10/12: The assessment and redress of Payment Protection
Insurance complaints; feedback on the further consultation in CP10/6 and final
Handbook text”;

“the Quality Control Team” means dedicated quality control staff that were based
within the PPI complaint handling operation and monitored complaint handlers;

“Relevant Period” means the period between 10 May 2011 and 30 July 2013; and

“retention cases” means the cases described at paragraph 4.28 below.

4.
FACTS AND MATTERS

4.1.
Clydesdale is a subsidiary of National Australia Bank Ltd and part of the Group.
Clydesdale provides a wide range of banking and financial services and has been
authorised by the Authority since 1 December 2001. Clydesdale operates the
Clydesdale Bank and Yorkshire Bank brands.

4.2.
PPI is an insurance product which is designed to help meet debt repayments in
certain circumstances when the customer is unable to make repayments, such as
in the event of an accident, sickness or unemployment and it may also include life
cover.

4.3.
Historically, Clydesdale sold five different types of PPI products:

(1)
single premium PPI to cover personal loans;

(2)
regular premium PPI to cover: (a) mortgages; (b) personal loans; and (c)
asset finance; and

(3)
revolving credit PPI to cover credit cards.

4.4.
Single premium PPI was paid for by customers in a single lump sum which was
added to the loan and attracted interest throughout the term of the loan. Regular
premium PPI was paid for by customers in instalments on a periodic, usually
monthly, basis. Revolving credit PPI was paid for by customers as a proportion of
their credit card balance, when they had an outstanding balance on their credit
card, and could attract interest if the credit balance was not paid off before the
next monthly statement.

4.5.
Clydesdale ceased all sales of PPI by March 2012 with asset finance PPI and single
premium loan PPI ceasing earlier in September 2007 and March 2009
respectively.

7


The Authority’s concerns about PPI

4.6.
There have been extremely serious problems in relation to PPI across the financial
services industry, including widespread weaknesses in PPI selling practices and a
very high number of complaints about PPI.

4.7.
On 14 January 2005, the Authority became responsible for regulating firms selling
general insurance products. Since that time the Authority has taken a series of
steps to ensure that customers were treated fairly in the sale of PPI.

4.8.
Firms conducting regulated activities are obliged to handle complaints in
accordance with the rules outlined in DISP. In particular, they are obliged to
investigate complaints, assess fairly whether complaints should be upheld and, if
so, to determine what redress or remedial action may be appropriate. If they
reject a complaint, they are obliged to notify the customer of the right to refer the
complaint to the ombudsman service.

4.9.
From 2005 onwards the Authority has published papers based on its thematic
work around sales of PPI that highlighted issues around the consideration of the
suitability of PPI for customers. Firms should have subsequently reflected these
issues in their complaint handling processes to ensure that they treated
customers fairly when handling PPI related complaints.

The Judicial Review of PS10/12

4.10. On 10 August 2010 the Authority published PS10/12 “The assessment and

redress of Payment Protection Insurance Complaints; feedback on the further
consultation in CP10/6 and final Handbook text” which introduced a package of
measures to be implemented by firms from 1 December 2010 that were intended
by the Authority to ensure that firms handled PPI complaints more fairly and
consistently and delivered fairer outcomes for customers who had been mis-sold
PPI.

4.11. On 8 October 2010 many UK banks, through the BBA, commenced judicial review

proceedings in relation to the Authority’s decision to introduce the measures
outlined in PS10/12. Clydesdale has publicly stated that it was not involved in the
Judicial Review.

4.12. On 20 April 2011 the High Court ruled in favour of the Authority and upheld

PS10/12 in all respects. On 9 May 2011, the BBA confirmed that it would not seek
to appeal the High Court’s decision, bringing the Judicial Review to an end.

The ombudsman service

4.13. The ombudsman service is an independent service, created by the Act, for settling

disputes between financial service providers and their customers. A customer who
is not satisfied with the outcome of a complaint may refer the complaint for
consideration by the ombudsman service.

4.14. The role of the ombudsman service is to assess the circumstances and to provide

an independent assessment of whether the outcome of the complaint was fair and
reasonable. Where, following an initial assessment, the ombudsman service takes
the view that the outcome was not fair and reasonable, it may propose a
settlement between the parties. If this is not accepted by both parties, the
ombudsman service will issue a final decision. It may conclude that the firm’s
findings were fair or it may conclude that they were unfair, in which case it may
decide to overturn the firm’s findings and direct the payment of redress. If so, it
produces a written decision with reasons which is provided to both the

complainant and to the firm. Subject to the limits set out in DISP, the firm is
legally bound by the terms of the decision.

4.15. Firms should take account of the decisions of the ombudsman service in operating

their complaint handling procedures. In addition to determining complaints, the
ombudsman service provides, through its website, information about relevant
matters including generic information about PPI related complaints and the
approach of the ombudsman service.

Clydesdale’s PPI complaint handling operation

4.16. From January 2011, Clydesdale established a separate PPI complaint handling

operation and associated governance framework. Policy decisions relating to the
PPI complaint handling operation were approved by one or two levels of
committees.

4.17. There were approximately 150 to 250 staff within the complaint handling

operation during the Relevant Period.

4.18. PPI complaints received by Clydesdale were handled in the first instance by

complaint handlers within its BAU PPI team.

4.19. If a PPI complaint was rejected by Clydesdale or if the customer was dissatisfied

with the redress offered in respect of an upheld complaint, the customer could
refer the complaint to the ombudsman service. A team of complaint handlers
within Clydesdale’s PPI complaint handling operation, known as the FOS PPI
team, was responsible for dealing with PPI complaints referred to the ombudsman
service. This included responding to queries raised by the ombudsman service in
relation to PPI complaints.

4.20. In total during the Relevant Period, Clydesdale made decisions on approximately

126,600 PPI complaints (13,600 of these were referred to ombudsman service).
This included:

(1)
73,200 complaints which were fully investigated. Of those, 72% were
upheld and 28% were rejected;

(2)
29,700 complaints where Clydesdale determined that PPI had not been
sold to the customer; and

(3)
23,600 complaints where Clydesdale considered that it had inadequate
evidence to confirm whether PPI had or had not been sold to the customer.

4.21. During the Relevant Period approximately 5,700 complaints relating to

Clydesdale’s sale of PPI were assessed by the ombudsman service. Of those, 41%
were upheld by the ombudsman service in favour of the customer and 59% were
rejected.

4.22. In June 2011, following the outcome of the Judicial Review, Clydesdale initiated a

review by the professional services firm of all aspects of its PPI complaints
handling process, including a gap analysis of its complaint handling procedures
against the requirements of PS10/12. This review made a number of
recommendations which were implemented by Clydesdale.

The Authority’s File Review

4.23. As part of a thematic review into the fairness of medium-sized firms’ decisions

and redress for PPI complaints, the Authority requested a sample of files relating

to 46 PPI customers who had made complaints to Clydesdale between May 2011
and April 2012, to assess the adequacy of the handling of their complaints. The
sample covered 71 PPI sales.

4.24. The Authority determined that:

(1)
14 customers (30%) had received an unfair outcome because Clydesdale
had wrongly rejected the complaint;

(2)
23 customers (50%) had received a fair outcome; and

(3)
for 9 customers (20%) the Authority could not determine whether a fair
outcome had been provided because the evidence in the file was unclear.

Evidence of failings

Policy on loans

4.25. Clydesdale’s PPI complaint handlers should have been considering all available

evidence when making decisions on PPI complaints. Where the original sales
documentation was not available, Clydesdale should have undertaken reasonable
searches to identify what other sources of information were available to it to
determine the existence of PPI, whether it had been mis-sold and the amount, or
a reasonable estimate, of any redress due (generally the amount that the
customer had paid for PPI). Complaint handlers should have weighed any
information they had with the evidence provided by customers.

Approval of the policy decision

4.26. Clydesdale had a document retention period which meant that documents relating

to products that had been repaid or closed more than seven years ago would not
be retained. The Authority makes no criticism of this document retention period.

4.27. At the beginning of the Relevant Period Clydesdale was dealing with a backlog of

overdue PPI complaints and a high volume of new PPI complaints. It was also
experiencing difficulties in identifying and retrieving relevant information for loans
that had closed more than seven years prior to the date of complaint. In most
cases, the original sales documentation was no longer available and other sources
of information that were available (such as bank statements) were time
consuming to review, sometimes incomplete and did not always provide sufficient
information to determine whether the PPI had been mis-sold or to enable redress
calculations to be performed. This was adding to the time it was taking complaint
handlers to deal with complaints.

4.28. In May 2011, Clydesdale’s PPI governance committees approved a policy whereby

its PPI complaint handlers would no longer be required to search for PPI
documents relating to loans repaid or closed more than seven years before the
date the complaint was made (known internally as ‘retention’ cases).

4.29. It was known within Clydesdale that relevant documents were in some cases

available beyond Clydesdale’s seven year document retention period. These
documents would have been relevant to the consideration of PPI complaints, not
least as they confirmed the premium and interest that the customer had paid for
the PPI. Failing to search for these documents would have placed some
customers at a disadvantage. Although Clydesdale had noted internally that, in
most retention cases, there was insufficient documentation on which to base an
investigation, Clydesdale did not determine in how many cases documents were
in fact available prior to approving the policy on loans.

4.30. Representatives of Clydesdale’s legal and compliance departments were involved

in making the policy decision. Prior to the decision being approved, an opinion
was obtained from the legal department which noted the guidance in DISP App
3.3.8G (see the Annex to this Notice) but concluded that it was comfortable that
the PPI team was implementing a procedure which would treat all customers the
same way. The opinion did however note that the Authority might take a different
view and Clydesdale should document the reasons for the decision and the risks in
making the decision. Other than the policy decision itself (which noted that, in
most cases, Clydesdale no longer held sufficient information on which to base an
investigation), the Authority has not seen any evidence that the reasons and risks
associated with the policy were documented by Clydesdale.

Impact of the policy on loans on PPI complaint handling processes and outcomes
for customers

4.31. From June 2011, complaint handlers in the BAU PPI team would use a business

objects report (known as a ‘BOXI report’) for the customer to determine, among
other things, the date the loan was repaid. A BOXI report was a print out of
information held on Clydesdale’s systems listing all products sold by Clydesdale to
the customer and would in some cases give an indication of whether PPI had been
purchased with a loan.

4.32. If the BOXI report showed that the loan was repaid more than seven years before

the complaint was made, complaint handlers would not conduct any searches of
Clydesdale’s
electronic
systems
(for
example,
its
‘LiveLink’
document

management system onto which loan documentation was scanned and indexed)
for relevant documents. This was despite the fact that key documents (such as
loan agreements) were, in a small percentage of cases, available on LiveLink
beyond Clydesdale’s seven year retention period and could therefore easily have
been considered by complaint handlers.

4.33. Moreover, even where loan agreements were no longer available on LiveLink,

complaint handlers could have searched other sources of information, such as
bank statements (which Clydesdale maintained electronically, or on microfiche
records, as far back as 1990 and in some cases earlier, although customer
microfiche records were sometimes incomplete). In some cases, this information,
together with information held by third parties (such as the PPI product provider),
would have provided sufficient information for complaint handlers to investigate
the complaint and determine redress.

4.34. In retention cases, customers were told in final response letters issued by the BAU

PPI team that due to the time elapsed, Clydesdale was unable to investigate their
complaints further. This was despite PPI complaint handlers not in fact having
checked what information was available to enable them to determine the
complaint (and in circumstances where they would in some cases have been
aware that the BOXI report indicated that the customer had taken out PPI). There
were, however, some issues with the completeness and accuracy of BOXI reports,
and they would not always accurately reflect whether PPI was in fact sold to a
customer. Customers were told that if they were in possession of the original loan
agreement then the complaint could be investigated further.

4.35. This approach was applied even to retention cases involving sales of single

premium PPI made before 2008, despite Clydesdale’s policy (for non-retention
cases) that complaints about such sales should be automatically upheld because
its root cause analysis had identified these sales as being inadequate (see
paragraph 4.106 below). In some cases (in particular, PPI sold by Clydesdale
through its Yorkshire Bank brand), it should not have been necessary for

complaint handlers to see the loan agreement in order to be able to determine
these complaints.

Missed opportunities by Clydesdale to reconsider the policy on loans

4.36. After the policy on loans was implemented, Clydesdale initiated the review by the

professional services firm referred to in paragraph 4.22 above. The professional
services firm did not raise concerns with the policy on loans.

4.37. Nonetheless, Clydesdale had numerous opportunities to reconsider the policy but

failed to do so.

4.38. From early August 2011, the ombudsman service began to raise queries with

Clydesdale about the searches that had been carried out in individual retention
cases to locate relevant documentation. In particular, from October 2011, the
ombudsman service started to ask Clydesdale to supply it with screen prints
evidencing the searches undertaken to confirm that loan documentation could not
be located. These requests (which became increasingly more persistent) should
have prompted Clydesdale to reconsider the policy on loans as it should have
been clear from the ombudsman service’s communications that it expected
Clydesdale to search its systems for all available information relevant to a
customer’s complaint.

4.39. In October 2011 Clydesdale identified that, following the implementation of the

policy on loans, the average number of PPI policies considered for each loan
complaint had halved from 3.8 policies to 1.9 policies. Between June 2011 (when
the policy decision was implemented) and October 2011, Clydesdale considered
approximately 3,900 complaints relating to personal loans so Clydesdale
considered approximately 7,400 fewer PPI policies than it might have done had it
applied the previous policy, albeit that in many of these cases it may not have
been possible for Clydesdale to have investigated these policies due to insufficient
documentation.

4.40. In January 2012, the ombudsman service wrote to financial services practitioners,

including Clydesdale, about the steps that should be taken to identify whether PPI
was sold to a customer. In that letter the ombudsman service outlined that it
would typically expect to see evidence that firms had taken a number of steps
including:

(1)
conducting reasonable searches of their systems (including archive
systems);

(2)
reviewing all available information about the customer; and

(3)
setting out in the final response to the customer the level of investigation
that had been undertaken together with relevant supporting documents
(for example, screen-shots).

4.41. However, Clydesdale did not reconsider at that stage whether the policy on loans

was appropriate and, accordingly, no amendment was made to this policy.

4.42. In March 2012 Clydesdale clarified, through another policy decision, that the

policy on loans approved in May 2011 also included mortgages. Clydesdale did not
review the impact of the original policy change in May 2011 nor were there any
discussions about whether the policy was still appropriate. During the period that
the policy on loans was in force Clydesdale determined approximately 4,100
complaints relating to mortgage PPI.

4.43. The ombudsman service’s requests for screen prints in individual cases continued

over 2012 and 2013, and, again, should have prompted Clydesdale to reconsider
the policy on loans.

4.44. Despite the above prompts, Clydesdale did not change its policy on loans until

late June 2013 following feedback from the Authority. After this date its complaint
handlers searched LiveLink for all loans even if they were repaid more than seven
years prior to the date of the complaint and fully investigated/upheld complaints
where documents were found.

4.45. During the period the policy on loans was in place (1 June 2011 to 25 June 2013),

up to approximately 28,200 loan and mortgage PPI complaints may have been
rejected unfairly and up to approximately 44,900 loan and mortgage PPI
complaints may have resulted in inadequate redress for customers as a result of
this policy decision.

Misleading the ombudsman service with regard to the policy on loans

4.46. As referred to above, if complaints were referred to the ombudsman service, they

would be handled by Clydesdale’s FOS PPI team.

4.47. The FOS PPI team complaint handlers were responsible for submitting to the

ombudsman service ‘Business Response Forms’ setting out the rationale for the
rejection of the complaint, together with the evidence supporting that decision.

4.48. During the period that the policy on loans was in place, the standard wording

used in the Business Response Forms for retention cases, similar to the wording
used in letters to customers, was:

‘unfortunately we have been unable to trace any documentation to allow us to
carry out an investigation … due to the length of time that has elapsed since the
loan account was closed.’

This wording was misleading as it suggested that a search had been conducted
when, in fact, complaint handlers had not even checked whether relevant
documents were available.

4.49. Moreover, in retention cases, while FOS PPI team complaint handlers would not

generally know whether loan documentation was available, members of the FOS
PPI team would on occasion come across loan documents for loans dated outside
the seven year retention period, either by accident or because they had searched
for them out of curiosity. However they would not take these documents into
account for the purpose of dealing with the complaint in question, and would still
cite the above wording in Business Response Forms submitted to the ombudsman
service. It appears that the FOS PPI team did so in order to take the approach
they thought to be consistent with the policy on loans. The Authority has not seen
evidence of this issue being escalated or known to the PPI leadership team or
Clydesdale’s management.

4.50. Furthermore, Clydesdale was not transparent with the ombudsman service as to

the nature of the policy on loans, and its consequences, despite various
opportunities to provide clarification. Members of the FOS PPI team escalated
concerns on a number of occasions as to how they should explain the policy to the
ombudsman service. Although Clydesdale’s PPI leadership team had various
discussions with the ombudsman service regarding its approach to cases where
there was uncertainty about whether PPI had been sold to a customer, Clydesdale
did not inform the ombudsman service that Clydesdale was in fact not conducting

any searches for records in relation to retention cases, despite knowing that in
some cases relevant documents might be available.

4.51. As late as early June 2013, in an exchange relating to a case Clydesdale had

incorrectly rejected because the customer could not provide a copy of the original
loan agreement (the case had been thought to be a retention case but proved not
to be), the ombudsman service said that it hoped the way in which the complaint
had been handled was not Clydesdale’s standard approach. The response, from a
member of Clydesdale’s PPI leadership team, stated merely that it was not
Clydesdale’s standard approach to disregard a complaint where there were limited
records available to evidence the sale of the policy. This was despite the fact that,
in retention cases, where customers could not provide a copy of the original loan
agreement, Clydesdale would simply reject complaints without searching its own
systems.

4.52. On another occasion involving a retention case in October 2011, a member of the

FOS PPI team stated to the ombudsman service that Clydesdale did not hold any
records prior to the seven year document retention period. This was misleading
as, in some cases, documentation was available.

Credit card policy

4.53. Clydesdale’s PPI complaint handlers should have been considering all PPI

payments made by customers in its redress calculations. Where credit card
statements were missing, Clydesdale should have considered what alternative
options were available to ensure customers who had complained would not be
disadvantaged, for example by estimating or making reasonable assumptions
about the value of the payments made by the customer.

Approval of the policy decision

4.54. Clydesdale retained transactional data for credit cards in electronic form for the

period from 2000 onwards. For the period prior to 2000, statements were
available for some of the period between the late 1980s and 2000 in microfiche
form, but there were large gaps in the data and it was not easily identifiable or
retrievable.

4.55. In June 2011 Clydesdale’s PPI governance committees approved a policy whereby,

if a customer’s credit card statements were not available or some were missing,
Clydesdale would, when calculating redress, assume that the customer’s balance
was the higher of:

(1)
the last statement before the period of missing statements;

(2)
the next statement after the period of missing statements; or

(3)
the carried forward balance on the next statement after the period of
missing statements.

4.56. In July 2011, the professional services firm referred to at paragraph 4.22 advised

that this policy may have resulted in customers being paid a disproportionately
large amount of redress. In August 2011, following discussions with the
professional services firm, Clydesdale’s PPI governance committees approved a
new policy whereby, for credit card complaints, PPI complaint handlers would not
check any credit card statements for the period prior to the year 2000 when
calculating redress, or make any assumptions to estimate the redress due for this
period. At the time of the decision, it was known that credit card statements were
available in microfiche form for some of the period prior to 2000.

4.57. A paper provided to the more senior PPI governance committee when it approved

the policy included an example provided by the professional services firm to
demonstrate the effect of the policy. The example showed that, based on the
assumption that Clydesdale first sold PPI for credit cards in 1998, redress under
the old policy (calculated back to 1998) was calculated as £11,600. Under the
new credit card policy (calculated back to 2000), redress was calculated as
£8,000.

4.58. In fact, the average redress paid by Clydesdale to credit card customers during

the period that the credit card policy was in place (approximately £2,400) was
£1,380 lower than the average redress paid to credit card customers for the
remainder of the Relevant Period (approximately £3,780).

4.59. Despite the change in policy, while Clydesdale made some amendments to the

relevant template letters, the letters sent between August 2011 and June 2013 to
customers whose credit card complaints had been upheld did not inform
customers that Clydesdale was not paying any redress in respect of the pre-2000
period. Where statements were missing for the post-2000 period, the letters also
retained the previous wording that assumptions had been used to calculate
redress where statements were missing without explaining that this approach had
only been used for the post-2000 period. This was misleading. In addition, until
April 2013, the template letters used by the FOS PPI team for customers whose
credit card complaints had been upheld following a referral to the ombudsman
service stated that Clydesdale intended to place customers in the position they
would have been in had they never taken out PPI. This was also misleading as,
from August 2011, Clydesdale’s policy was to not calculate redress for the period
prior to the year 2000.

Missed opportunities to reconsider the credit card policy

4.60. After the credit card policy was implemented, Clydesdale had numerous

opportunities to reconsider the policy but failed to do so. In August 2011 a
member of the FOS PPI team raised concerns about the credit card policy with
Clydesdale’s PPI leadership team. These included concerns that the policy was not
in line with guidance issued by the ombudsman service of making assumptions
where statements were missing or unavailable and did not put the customer back
into the position they would have been in had the PPI policy not been mis-sold.
The FOS PPI team continued to raise concerns with Clydesdale’s PPI leadership
team in 2011 and 2012.

4.61. Moreover, from late 2011 through to early 2013, the ombudsman service was

consistently challenging the credit card policy in correspondence with Clydesdale’s
FOS PPI team on individual complaints which, again, was escalated to
Clydesdale’s PPI leadership team. Clydesdale consulted with the professional
services firm during this period who did not raise concerns that the policy needed
to be changed.

4.62. At an internal meeting on 26 November 2012, one of Clydesdale’s PPI governance

committees, considered whether it was appropriate to continue with the credit
card policy due to the challenges from the ombudsman service. However,
Clydesdale concluded that it was comfortable that the policy was still appropriate.

4.63. In January 2013, Clydesdale obtained additional advice from another professional

services firm regarding its approach to PPI complaint handling. Following this
advice and further consideration of the matter, Clydesdale finally engaged in a
further dialogue about the credit card policy with the ombudsman service during
2013, which led to it introducing a revised redress approach after the Relevant

Period which involved making reasonable assumptions to estimate redress for the
period from the inception of the PPI policy through to 2000.

4.64. From 23 August 2011 (when the credit card policy was introduced) until the end

of the Relevant Period, up to approximately 5,900 credit card PPI complaints
investigated and upheld by Clydesdale may have resulted in inadequate redress
for customers as a result of this policy decision.

Lack of transparency with the ombudsman service as to the nature of the credit
card policy

4.65. The ombudsman service’s challenge about the credit card policy was that

Clydesdale was not making assumptions for the pre-2000 period where
statements were missing. Throughout Clydesdale’s communications with the
ombudsman service regarding the credit card policy, Clydesdale in fact failed to
disclose that it held microfiche records of credit card statements for some of the
pre-2000 period but was not searching these.

Provision of false print outs to the ombudsman service about the extent
of the records held by Clydesdale on the PPI policies sold to customers

4.66. As noted earlier, from October 2011, the ombudsman service was requesting

Clydesdale to provide screen prints in individual cases.

Providing misleading communications to the ombudsman service as to the reasons
why screen prints could not be provided prior to May 2012

4.67. The standard response given by the FOS PPI team to the ombudsman service’s

requests for screen prints prior to May 2012 on specific retention cases was ‘Due
to the nature of our internal system, we are unable to supply screen prints.’ This
was approved as a standard response by a member of Clydesdale’s PPI leadership
team. However, this was misleading as, in fact, screen prints could have been
generated from Clydesdale’s internal systems.

Provision of false print outs to the ombudsman service

4.68. In May 2012, following internal discussions with Clydesdale’s legal, compliance

and data protection teams, Clydesdale reached an agreement with the
ombudsman service as to the nature of the prints that would be provided on
request to evidence that no documents had been located for the PPI product that
was the subject of the complaint.

4.69. From this date until June 2013, Clydesdale’s FOS PPI team adopted practices of

providing false information to the ombudsman service in response to requests
from the ombudsman service as to the extent of the records Clydesdale held on
the PPI policies sold to individual customers. The information was contained in
LiveLink screen prints and BOXI reports provided by the FOS PPI team to the
ombudsman service in line with the above agreement.

4.70. The practices had arisen, at least in part, because of a desire by the FOS PPI team

to ensure that the information provided to the ombudsman service was consistent
with Clydesdale’s statements in Business Response Forms that information was
not available about the PPI sold, due to Clydesdale’s policy on loans.

4.71. The practices were not part of Clydesdale’s documented procedures and were not

known to or authorised by Clydesdale’s management or PPI leadership team.
Upon becoming aware of the issues Clydesdale took immediate steps to end the
practices or confirm that they had ended, commissioned internal investigations to

investigate the conduct and reported on the outcome of these investigations to
the Authority.

4.72. As a result of Clydesdale’s FOS PPI team’s actions the ombudsman service would

in some cases have been misled about the information available for the purpose
of determining the complaint and/or appropriate redress. Customers may
therefore have been disadvantaged. The provision of false information has also
led to delays in the ombudsman service considering complaints while the
inaccuracies in the evidence provided are resolved.

False system print outs from LiveLink provided to the ombudsman service about
the documents available for individual customers

4.73. Clydesdale scanned and indexed loan sales documentation (which would evidence

the sale of PPI and the amount of premium and interest payable by the customer)
on LiveLink. A search against LiveLink would generate a screen print showing a
list of documents held by Clydesdale in relation to a particular customer or loan
account. Where no documentation was held, the search would state that there
were no records found.

4.74. From May 2012, Clydesdale agreed that its FOS PPI team would provide a

LiveLink screen print to the ombudsman service on request. When the FOS PPI
team searched LiveLink for retention cases in response to a request for screen
prints from the ombudsman service, in most cases the search would state that
there were no records found. However, where the FOS PPI team searched LiveLink
and found that documents were still available for a retention case, the
ombudsman service was not informed. Rather, to ensure that the information
provided to the ombudsman service was consistent with the statements made in
the Business Response Form that records were not available, the FOS PPI team
provided false print outs to the ombudsman service. This was achieved either by
searching under an incorrect loan account number to produce a system print out
stating that no records had been found, or by physically substituting the actual
results print out with a print out from another customer file that stated that no
records had been found.

4.75. From the print outs provided, the ombudsman service could not have identified

that, contrary to what had been stated in the Business Response Form,
Clydesdale did in fact hold information relevant to the complaint. As a result the
ombudsman service would not have had all relevant documents available to
determine the complaint and/or the redress due to the customer.

4.76. The Authority considers that this practice is likely to have affected a small number

of cases.

4.77. The practice was only identified by Clydesdale in May 2014 after a member of the

FOS PPI team raised concerns, although the practice had in fact ceased in June
2013 due to other changes being made by Clydesdale to its procedures following
the Authority’s feedback on Clydesdale’s policies more generally.

4.78. In one case:

(1)
Clydesdale rejected a complaint made in late 2011 from a husband and
wife who had taken out single premium PPI on a loan on the basis that the
loan had closed more than seven years prior to the date of the complaint,
informing the customers that the complaint could not be investigated
“[d]ue to the time elapsed” and inviting the customers to send in the loan
agreement. In fact, Clydesdale held (but had not searched for) a copy of
the loan agreement, which showed that the customers had been sold

single premium PPI in 1998 at a cost of £2,800. In accordance with its
policy of automatically upholding single premium PPI sales prior to 2008,
Clydesdale should have automatically upheld the complaint and refunded
the premium to the customers.

(2)
Following referral of the complaint to the ombudsman service, Clydesdale
maintained that the complaint could not be investigated, stating in the
Business Response Form that it was “unable to trace any documentation”.
In fact, no search of Clydesdale’s systems had been undertaken.

(3)
Following a request from the ombudsman service for copies of screen
prints to evidence the systems searched by Clydesdale, searches
conducted by Clydesdale’s FOS PPI team revealed that Clydesdale did in
fact hold a copy of the relevant loan agreement. However, in response to
the request from the ombudsman service, the FOS PPI team altered the
screen print to make it look as if Clydesdale held no records, and sent this
to the ombudsman service.

(4)
As a consequence, the ombudsman service was unable to determine the
customers’ complaint. It notified the customers in May 2013 that it was
unable to consider the complaint further due to the lack of available
records. Had the information available been considered by Clydesdale, or
had the ombudsman service been provided with the correct information,
the customers are likely to have received compensation of up to £5,100.

(5)
Clydesdale will be reviewing this complaint as part of the review described
at paragraph 2.9(4) above.

Alterations to BOXI reports

4.79. As noted in paragraph 4.31, BOXI reports were print outs of information held on

Clydesdale’s systems listing the products sold by Clydesdale to the customer. In
some cases, the BOXI report would also give an indication of whether PPI had
been purchased with a loan, although there were some issues with the accuracy
and reliability of this information. BOXI reports were printed by the BAU PPI team
and included in all complaints files.

4.80. From May 2012, Clydesdale agreed that its FOS PPI team would provide BOXI

reports to the ombudsman service on request. For example, where Clydesdale had
indicated that original PPI sales documents were not available, the ombudsman
service may have requested the BOXI report to confirm that Clydesdale held no
other records of the PPI sale.

4.81. Where the ombudsman service requested a copy of a BOXI report, Clydesdale

considered that any information not relevant to the complaint should be removed
from the BOXI reports. However, between May 2012 and June 2013, the FOS PPI
team were in fact going further in its alterations and adopted a practice of
removing all PPI information from the BOXI reports, even where the information
was relevant to the specific PPI policy against which the complaint was raised.
One of the FOS PPI team’s reasons for doing this was to ensure that the BOXI
reports did not contain information that contradicted the policy on loans.

4.82. As a result of Clydesdale’s FOS PPI team not providing all relevant PPI information

to the ombudsman service, the ombudsman service would not have been able
properly to determine the complaint and/or the redress due to the customer.
Subject to the reliability and accuracy issues noted above, unedited BOXI reports
together with other information, such as bank statements, in some cases provided
sufficient information to investigate the complaints and determine redress (for

example, complaints about Yorkshire Bank single premium PPI sold prior to
2008).

4.83. During the period when this practice was in place (late May 2012 until late June

2013), up to approximately 6,800 loan and mortgage PPI complaints referred to
the ombudsman service were at risk of an altered BOXI report being sent to the
ombudsman service.

Factors contributing to the FOS PPI team’s practices of providing false system
screen prints

4.84. Clydesdale did not consider all of the consequences of the policy on loans when

approving it in May 2011, in particular what information should be provided to the
ombudsman service about the documents available to Clydesdale to determine
retention cases.

4.85. Clydesdale should have been prompted to reconsider this issue on numerous

occasions but failed to do so. These occasions were:

(1)
those set out at paragraphs 4.38, 4.40 and 4.42 - 4.43 above; and

(2)
in October 2011, when a FOS PPI team member, in asking a member of
Clydesdale’s PPI leadership team for appropriate wording to use in
response to the ombudsman service’s requests for screen prints evidencing
the documents held by Clydesdale, queried whether BOXI reports could be
sent because all loans (including those repaid more than seven years ago)
would be listed on them.

4.86. As a result, the FOS PPI team was not given adequate guidance as to what

information should be provided to the ombudsman service. In particular,
following the agreement with the ombudsman service to provide screen prints in
May 2012, no written guidance was provided to the FOS PPI team as to the
process that should be followed until October 2012. Even then:

(1)
there was no specific guidance issued to the FOS PPI team as to what
amendments could or should be made to BOXI reports; and

(2)
there was no mention of the approach to be taken in retention cases where
the screen prints requested actually revealed the existence of loan
documents, contrary to Clydesdale’s position that information was not
available.

4.87. This was despite the fact that Clydesdale was aware that relevant documents

might be available beyond the seven year retention period in some cases.

4.88. As a result, in retention cases, the FOS PPI team was left to decide for itself how

it could respond to the ombudsman service’s requests where documents had been
found to be available, whilst remaining consistent with Clydesdale’s statements
(in the final response letters sent to customers and the Business Response Forms
submitted to the ombudsman service) that information could not be traced and/or
the complaint not investigated due to the time that had elapsed. Consequently,
for these cases, the FOS PPI team implemented a practice of providing false
information to the ombudsman service in the form of altered screen prints.

4.89. While the practices were not known to or authorised by Clydesdale’s management

or the PPI leadership team, the Authority considers that the tone and example set
by Clydesdale’s PPI leadership team in some of its communications with the
ombudsman
service,
particularly
the
lack
of
transparency
surrounding

Clydesdale’s loan and credit card policies and the ability to provide screen prints,
as described above, is likely to have contributed to the FOS PPI team
implementing these practices.

4.90. Moreover, the support and monitoring of the FOS PPI team during the Relevant

Period was weak. Among other things, Clydesdale did not carry out any quality
assurance or other monitoring of the information and documents provided by the
FOS PPI team to the ombudsman service which might have revealed that false
information was being provided in some cases.

Failure by complaint handlers to assess adequately whether the PPI for
the customer was suitable

4.91. Clydesdale’s complaint handlers should have been considering whether sales

advisers had made a proper assessment of the suitability of PPI policies for
customers at the point of sale, and upholding complaints where this was not the
case.

4.92. Clydesdale’s complaint handling policies and processes were inadequate because

they did not sufficiently prompt complaint handlers to make an assessment of the
overall suitability of the PPI policy.

4.93. The training given to complaint handlers also did not make reference to making

an overall assessment of suitability.

4.94. As a result complaint handlers were failing to uphold complaints where the

information on the file would suggest that the PPI policy was not suitable for the
customer.

4.95. The Authority’s File Review identified that, in 14 out of the 46 complaints (30%),

complaint handlers did not identify that the sales adviser’s evaluation of
suitability was inadequate, or that the sale may otherwise have been unfair. In
four cases, the limitations or exclusions of the PPI policy were not adequately
disclosed. In two cases, the evidence suggested pressure selling. In 10 of the 14
cases, complaint handlers failed to identify that the sales adviser’s evaluation of
suitability was inadequate because the adviser had not properly assessed whether
a customer’s existing employee benefits and/or propensity to refinance meant
that the PPI policy was unsuitable. These failings are described in more detail
below.

4.96. Up to approximately 20,600 loan, mortgage, credit card and asset finance PPI

complaints may have been unfairly rejected as a result of this issue.

Failure by complaint handlers to identify inadequate assessments of customers’
existing employee benefits at the point of sale

4.97. Clydesdale’s complaint handlers should have been considering if sales advisers

had properly assessed whether the existing benefits provided by a customer’s
employer in terms of accident, sickness and life cover meant that the PPI policy
was unsuitable.

4.98. Clydesdale’s policies and training were inadequate. While there was high level

guidance that complaint handlers should consider whether the customer had
existing cover, Clydesdale’s guidance and training did not specifically refer to
consideration of existing employee benefits. Moreover the guidance did not
sufficiently prompt complaint handlers to consider whether the sales adviser’s
assessment of the impact of employee benefits on the suitability of the policy was
correct.

4.99. The Authority’s File Review identified that, in 9 out of the 46 complaints (20%),

complaint handlers failed to identify that the sales adviser’s evaluation of
suitability was inadequate because the adviser had not properly considered
whether the customer’s existing employee benefits made the PPI policy
unsuitable.

4.100. For example, in one case reviewed by the Authority, during the sales telephone

call the customer’s employee benefits were not fully discussed. However, the
customer had been employed by the same university for over 12 years and would
have been entitled to redundancy payments as well as six months’ full pay and
six months’ half pay in the event of being unable to work due to an accident or
sickness. In rejecting the complaint, the complaint handler stated that the
customer had not informed the sales adviser that they had sufficient cover from
their employer despite the recording of the sales call confirming that the sales
adviser had not adequately discussed existing cover with the customer.

Failure by complaint handlers to identify inadequate assessments of customers’
propensity to refinance at the point of sale

4.101. Clydesdale’s complaint handlers should have been considering if sales advisers,

when recommending a single premium PPI policy to cover a loan, had properly
assessed whether customers had a propensity to refinance (i.e. whether they
were likely to cancel their loan before the end of the term and replace it with a
new one) or to repay their loan before the end of the term.

4.102. If the customer had refinanced their loan or repaid it early, they would have

received a refund which was substantially less than a ‘pro rata’ refund, and
therefore would have paid a PPI premium which was disproportionately large
considering the limited amount of time that they had had the policy. Therefore
the single premium PPI product may not have met the needs of customers who
expected (or were likely to want) to refinance the loan or repay it early.

4.103. Clydesdale’s policies were inadequate as complaint handlers were only required to

consider:

(1)
whether the customer had stated an intention at the time of the sale to
repay the loan early; and

(2)
whether the sales adviser had considered, and advised the customer of,
the refund terms applicable in the event of early redemption.

4.104. The guidance given to Clydesdale’s complaint handlers did not therefore require

them to undertake a full assessment of the evidence regarding a customer’s
propensity to refinance or repay their loan early.

4.105. Similarly, while there were references made to the non-pro rata refund terms in

the training for complaint handlers, the training did not make any reference to the
consideration that complaint handlers should give to the impact of a customer’s
propensity to refinance on suitability over and above the policies provided to the
complaint handlers, which, as described above, were inadequate.

4.106. Clydesdale identified through its root cause analysis that its sales standards for

single premium PPI were inadequate before March 2008 for sales made through
its branches and before May 2008 for sales made through its other sales channels.
Where there was adequate evidence of PPI having been sold, Clydesdale therefore
automatically upheld any single premium PPI complaints where the sale was
made before 2008, subject to loan documents being available under the policy on
loans noted above (otherwise the complaint would not be considered). With

respect to complaints from customers who purchased single premium PPI after
March/May 2008, however, complaint handlers were not adequately considering
the customer’s propensity to refinance or repay the loan early.

4.107. The Authority’s File Review identified that in 8 out of the 46 complaints (17%)

complaint handlers had failed to identify that sales advisers had not properly
considered the customer’s propensity to refinance or repay the loan early when
making a recommendation. In some cases, the complaint handlers also failed to
identify that the customer did in fact have a propensity to refinance even though
there was clear evidence on the file.

4.108. For example, in one case reviewed by the Authority, the purpose of the loan was

to repay existing debts and during the sales call the customer enquired about the
possibility of redeeming the loan early. While the customer was told that the
policy had a non-proportionate refund on cancellation the suitability of a single
premium policy was not considered during the sale. These issues were not
identified and considered by the complaint handler despite there being clear
indicators of a propensity to refinance.

Inadequate monitoring of complaint handlers

4.109. Clydesdale’s framework for monitoring the quality of the decisions made by its

complaint handlers was inadequate. Clydesdale had three lines of defence over its
PPI complaint handling operation, none of which identified the deficiencies in its
PPI complaint handling described above.

First line of defence

4.110. During the Relevant Period the complaint handlers were monitored by the Quality

Control Team which was based within the PPI complaint handling operation. All
complaint files were submitted by the complaint handler to the Quality Control
Team from which a sample was reviewed.

4.111. Until January 2012, the sample of complaints monitored for each complaint

handler was inadequate as it was not fully risk-based. While the sample was
increased for trainees or complaint handlers where quality issues had been
identified, the sample selection did not have regard to the type of PPI policy or
the types of issues considered. PPI complaints involving consideration of more
complex issues would not therefore be monitored more closely than more
straightforward complaints.

4.112. Throughout the Relevant Period, the monitoring checklists used were basic and

focused on whether the proper administration process had been followed by the
complaint handler. The checklists did not prompt the monitoring staff to make an
adequate overall assessment of whether fair outcomes were being achieved for
customers. Only one high level question addressing the adequacy of the complaint
decision was considered “Decision correct and rationale documented” and then a
space was provided for any observations noted. There was no guidance in the
checklist to explain what factors should be taken into account over and above the
policies provided to complaint handlers (which, as referred to above, were not
adequate).

4.113. The professional services firm identified a number of issues with the monitoring in

place in a report in August 2011, including that the monitoring was not fully risk-
based and that the monitoring checklist and guidance notes focused on whether
the correct process had been followed rather than assessing the quality of the
complaint decision reached. In conjunction with the professional services firm,
Clydesdale took steps to address these issues, including making the sample of

complaints monitored more risk-based. Notwithstanding these changes, the
sample of complaints monitored remained insufficiently risk-based and the
monitoring checklist and guidance remained inadequate.

Second and third lines of defence

4.114. Prior to October 2011, second line review was conducted by the Compliance

Monitoring Function. Between October 2011 and November 2012 the Compliance
Monitoring Function formed part of the Internal Audit Function such that second
and third line review was effectively conducted by different functions within the
same area. After November 2012 the second line was restored to a separate,
differentiated Compliance Monitoring Function.

4.115. During 2011, Clydesdale relied principally on the monitoring activity that was

undertaken by the first line Quality Control Team and the review work that was
being undertaken by the professional services firm that had been engaged by
Clydesdale.

4.116. The only second/third line review of PPI complaint handling during the Relevant

Period was undertaken by the Compliance Monitoring Function, the findings of
which were reported in May 2012. The review identified one material issue
relating to the consideration of complaints prior to the Relevant Period and a
number of minor amendments that needed to be made to Clydesdale’s policies
and procedures. Overall, however, the review concluded that Clydesdale’s PPI
complaint handling was effective in practice and was operating in line with
regulatory standards. Other than a follow up review undertaken in March 2013 to
confirm that the earlier review’s recommendations had been implemented, no
further testing was conducted by the Compliance Monitoring Function during the
remainder of the Relevant Period.

4.117. The scope of the Compliance Monitoring Function review and the testing

undertaken, including a sample of 90 complaints, should have been sufficient to
identify the failings in Clydesdale’s processes around the consideration of
suitability by PPI complaint handlers and the weaknesses in first line controls but
the review itself was either inadequately conducted or the results of the review
were not assessed appropriately.

Monitoring of information being provided to the ombudsman service

4.118. As stated above, there was no quality assurance or other monitoring of the

information and documents produced by the FOS PPI team prior to providing them
to the ombudsman service which might have revealed that false information was
being provided.

Training of complaint handlers

4.119. All new complaint handlers received the same initial induction training and then

went through additional training within their team. The training material
presented to complaint handlers included information about Chapter 1 of the
Authority’s Handbook that relates to general complaint handling requirements.
The training did not however cover Appendix 3 to DISP which sets out specific
considerations when handling PPI complaints. The only references to Appendix 3
were contained in the ‘common failings spreadsheet’ provided to complaint
handlers, which contained guidance about the common sales failings identified in
PS10/12. Moreover, the relevant wording from Appendix 3 was not included.

4.120. Monitoring (Quality Control) staff and the FOS PPI team staff were generally

previously BAU PPI team complaint handlers and attended the induction training

when they first became BAU PPI team complaint handlers. They did not however
receive any additional formal training when their role changed, only informal
training within the Quality Control Team and the FOS PPI team.

Steps taken to address issues

4.121. From May 2013, following discussions with the ombudsman service, Clydesdale

took steps in consultation with the ombudsman service to modify its credit card
policy and implement an appropriate method for calculating redress for credit card
PPI customers before the year 2000.

4.122. Once Clydesdale received feedback from the Authority’s File Review in June 2013,

it implemented changes to its policy on loans, so as to require complaint handlers
to carry out more checks for available loan and mortgage documents. Clydesdale
also revised its practice on the provision of information to the ombudsman
service, by ensuring that BOXI reports were provided in unaltered form and that
complaints were investigated wherever loan documentation was located on
LiveLink, even if the complaint related to a loan which had been repaid more than
seven years prior to the date of the complaint.

4.123. Clydesdale also took proactive steps to enhance its governance and oversight

arrangements in relation to PPI complaints. This has included the establishment of
new PPI governance fora; changes in the PPI leadership team; allocating
responsibility for the oversight of the PPI complaint handling operation to a newly
established Customer Trust and Confidence function overseen by one of
Clydesdale’s Executive Directors, the purpose of which is to ensure an appropriate
focus on safeguarding customer interests throughout the customer journey;
significant enhancements to its three lines of defence risk management
framework; and the investment of approximately £96m which has been or will be
spent to enhance relevant systems, infrastructure and resources and to conduct
the review described at paragraph 4.125 below.

4.124. Clydesdale also at this time took steps to engage another professional services

firm to conduct a further comprehensive review of its PPI complaint handling
processes and to identify which customers had been affected by its failings so that
customers could be contacted and their complaints reviewed appropriately. The
Authority subsequently required this engagement to take place as a skilled
person’s review under section 166 of the Act. Clydesdale has co-operated in this
process.

4.125. Clydesdale has decided to review all PPI complaints handled prior to August 2014

and will pay appropriate redress to any affected customers. This process will be
overseen by the skilled person.

5.
FAILINGS

5.1.
Annex A sets out extracts from statutory and regulatory provisions and guidance
relevant to this Final Notice.

5.2.
During the Relevant Period Clydesdale breached Principle 6 because it failed to
pay due regard to the interests of its customers and treat them fairly when
handling complaints from its customers who had purchased PPI. It also breached
DISP 1.4.1R (1) and (2) and 1.4.4R.

5.3.
Specifically, on the basis of the facts and matters set out in paragraphs 4.24 to
4.120 (inclusive) above, Clydesdale:

(1)
implemented an inappropriate policy which meant that, for loan and
mortgage PPI complaints, complaint handlers would not search for PPI
documents relating to loans closed or repaid more than seven years before
the date of the complaint. This meant Clydesdale was not considering
these complaints unless customers provided loan documents to Clydesdale
even though, in a small percentage of cases, relevant information was
readily available on Clydesdale’s electronic systems;

(2)
implemented another inappropriate policy which meant that, for credit card
PPI complaints, complaint handlers would not consider credit card
statements that pre-dated the year 2000 when calculating redress or take
steps to estimate the payments made before that date. As a result some
customers may have received an inadequate amount of redress;

(3)
was, as a result of the practices adopted by the FOS PPI team, in some
cases providing false information to the ombudsman service about the
records it held on the PPI policies sold to customers. This would have
affected the ombudsman service’s ability to determine PPI complaints
appropriately and assess the appropriate amount of redress owed to
customers. These practices were not part of Clydesdale’s documented
procedures and were not known to or authorised by Clydesdale’s
management or PPI leadership team;

(4)
was not transparent with, and in some cases provided misleading
communications to, customers and the ombudsman service with regard to
how complaints affected by the two inappropriate policies referred to above
were dealt with;

(5)
failed to ensure that complaint handlers in its FOS PPI team were given
adequate guidance and support;

(6)
failed to ensure that its complaint handlers were identifying cases where
the underlying PPI sales were, or may have been, unsuitable. In particular,
complaint handlers were failing to identify cases where inadequate
consideration had been given to customers’ existing employee benefits and
propensity to refinance at the point of sale; and

(7)
failed to implement adequate training and monitoring of PPI complaint
handlers to ensure that complaints were handled fairly.

6.
SANCTIONS

Financial penalty

6.1.
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of
DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority
applies a five-step framework to determine the appropriate level of financial
penalty. DEPP 6.5A sets out the details of the five-step framework that applies in
respect of financial penalties imposed on firms.

Step 1: disgorgement

6.2.
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive a firm of the
financial benefit derived directly from the breach where it is practicable to
quantify this.

6.3.
Clydesdale has decided to review all PPI complaints handled prior to August 2014
and to pay appropriate redress to any affected customers. This process will be
overseen by the skilled person as part of the section 166 review. This should
negate the financial benefit obtained by Clydesdale as a result of its breaches.

6.4.
Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.5.
Pursuant to DEPP 6.5A.2G, at Step 2 the Authority determines a figure that
reflects the seriousness of the breach. Where the amount of revenue generated by
a firm from a particular product line or business area is indicative of the harm or
potential harm that its breach may cause, that figure will be based on a
percentage of the firm’s revenue from the relevant products or business area. The
Authority considers that the revenue generated by Clydesdale is not an
appropriate indicator of the harm or potential harm caused by its breach in this
case.

6.6.
The Authority considers that an appropriate alternative to indicate the harm or
potential harm caused by the breach to be a figure based on the potential redress
payable to the customer population whose PPI complaints were rejected by
Clydesdale during the Relevant Period or not investigated because Clydesdale
considered that it had inadequate evidence to consider the complaint.

6.7.
To reach the appropriate figure, the Authority has multiplied:

(1)
the number of PPI complaints rejected during the Relevant Period plus the
number of complaints during the Relevant Period which Clydesdale did not
investigate because it considered that it had inadequate evidence to
consider the complaint (42,227 complaints); by

(2)
the average redress paid by Clydesdale on upheld PPI complaints (adjusted
to take into account that, between 23 August 2011 and 30 July 2013,
Clydesdale
was
paying
insufficient
redress
on
credit
card

complaints)(£3,041.59). This amounts to £128,437,220.93.

6.8.
In cases where the Authority considers that revenue is an appropriate indicator of
the harm or potential harm that a firm’s breach may cause, in deciding on the
percentage that forms the basis of the step 2 figure, the Authority considers the
seriousness of the breach and chooses a percentage between 0% and 20%. This
range is divided into five fixed levels which represent, on a sliding scale, the
seriousness of the breach; the more serious the breach, the higher the level. For
penalties imposed on firms there are the following five levels:

Level 1 – 0%

Level 2 – 5%

Level 3 – 10%

Level 5 – 20%

6.9.
For the purposes of this case, the Authority has applied the same range of
percentages.

6.10. In assessing the seriousness level, the Authority takes into account various

factors, including those set out at DEPP 6.5A.2G(9) and 6.5A.2G(11). The
Authority considers the following factors to be relevant:

(1)
the breach caused significant loss or risk of loss to individual customers
who had complained about the sale of PPI;

(2)
the breach revealed serious or systemic weaknesses in Clydesdale’s PPI
complaint handling procedures, management systems and internal
controls, but does not impact other parts of Clydesdale’s business,
including its arrangements for the handling of non-PPI complaints;

(3)
the Authority considers that Clydesdale’s senior management appreciated
that there was a risk that their actions in approving the policy on loans
could result in a breach but failed adequately to mitigate that risk; and

(4)
Clydesdale’s FOS PPI team were in some cases providing false information
to the ombudsman service, including by altering documentary evidence to
make it look as if Clydesdale held no relevant documents when in fact
documents were available.

6.11. Taking all of these factors into account, the Authority considers the seriousness of

the breach to be level 5 and so the Step 2 figure is 20% of £128,437,220.93.

6.12. Step 2 is therefore £25,687,444.19.

Step 3: mitigating and aggravating factors

6.13. Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any
amount to be disgorged as set out in Step 1, to take into account factors which
aggravate or mitigate the breach.

6.14. The Authority considers that the following factors aggravate the breach:

(1)
since 2005 the Authority has published numerous papers, guidance and
enforcement notices that highlight issues around the consideration of
suitability during the sale of PPI. Given the number of publications, and the
time period elapsed since publication, Clydesdale should have ensured that
complaint handlers were considering these common sales issues when
determining PPI complaints during the Relevant Period to ensure that
customers were treated fairly. The publications included:

(a)
‘The sale of payment protection insurance – results of thematic
work’ dated November 2005. This publication noted, for example,
that employee benefits should be considered in the assessment of
suitability;

(b)
‘The Sale of Payment Protection Insurance – results of follow-up
thematic work’ dated October 2006;

(c)
‘The Sale of Payment Protection Insurance – Thematic update’
dated September 2007’. This publication noted, for example, that
propensity to refinance should be considered in the assessment of
suitability for single premium PPI policies;

(d)
an open letter addressed to the industry detailing ‘common point of
sale failings for PPI sales’ first published in September 2009 and

subsequently amended in March and August 2010. This publication
noted the issues raised in previous publications, including that
assessment should be made of employee benefits and propensity to
refinance;

(e)
the Authority also published papers prior to the Relevant Period
about complaint handling in general in 2010 (review of complaint
handling in banking groups) and also specifically on the handling of
PPI complaints in 2009/2010 (CP09/23, CP10/6 and PS 10/12); and

(f)
the ombudsman service has maintained a PPI Online Resource on
its website throughout the Relevant Period which details the
relevant considerations when assessing PPI complaints.

(2)
Clydesdale was fined £8,904,000 on 24 September 2013 for a breach of
Principle 6 due to a failure to pay due regard to the interests of customers
and treat them fairly after it discovered an error in how it calculated some
of its customers’ mortgage repayments.

6.15. The Authority considers that the following factors mitigate the breach:

(1)
early in the Relevant Period, Clydesdale initiated a review by a professional
services firm of all aspects of its PPI complaint handling process and
implemented the recommendations arising from that review; and

(2)
after the referral to Enforcement, Clydesdale agreed a number of the facts
with the Authority which has saved the Authority time and resource and
enabled the investigation to be completed in a more efficient and timely
manner.

6.16. Having taken into account these aggravating and mitigating factors, the Authority

considers that the Step 2 figure should be increased by 15%.

6.17. Step 3 is therefore £29,540,560.81.

Step 4: adjustment for deterrence

6.18. Pursuant to DEPP 6.5A.4G, if the Authority considers the figure arrived at after

Step 3 is insufficient to deter the firm who committed the breach, or others, from
committing further or similar breaches, then the Authority may increase the
penalty.

6.19. The Authority considers that the Step 3 figure of £29,540,560.81 represents a

sufficient deterrent to Clydesdale and others, and so has not increased the
penalty at Step 4.

6.20. Step 4 is therefore £29,540,560.81.

Step 5: settlement discount

6.21. Pursuant to DEPP 6.5A.5G, if the Authority and the firm on whom a penalty is to

be imposed agree the amount of the financial penalty and other terms, DEPP 6.7
provides that the amount of the financial penalty which might otherwise have
been payable will be reduced to reflect the stage at which the Authority and the
firm reached agreement. The settlement discount does not apply to the
disgorgement of any benefit calculated at Step 1.

6.22. The Authority and Clydesdale reached agreement at Stage 1 and so a 30%

discount applies to the Step 4 figure.

6.23. Step 5 is therefore £20,678,300.

6.24. The Authority therefore imposes a total financial penalty of £20,678,300 on

Clydesdale for breaching Principle 6 and DISP 1.4.1R(1) and (2) and 1.4.4R.

7.
PROCEDURAL MATTERS

Decision makers

7.1.
The decision which gave rise to the obligation to give this Final Notice was made
by the Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner of and time for Payment

7.3.
The financial penalty must be paid in full by Clydesdale to the Authority by no
later than 28 April 2015, 14 days from the date of the Final Notice.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding on 29 April 2015, the Authority
may recover the outstanding amount as a debt owed by Clydesdale and due to
the Authority.

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of
information about the matter to which this Final Notice relates. Under those
provisions, the Authority must publish such information about the matter to which
this Final Notice relates as the Authority considers appropriate. The information
may be published in such manner as the Authority considers appropriate.
However, the Authority may not publish information if such publication would, in
the opinion of the Authority, be unfair to Clydesdale or prejudicial to the interests
of consumers or detrimental to the stability of the UK financial system.

Authority contacts

7.6.
For more information concerning this matter generally, contact Pritheeva
Rasaratnam (direct line: 020 7066 9806) of the Enforcement and Market
Oversight Division of the Authority.

Guy Wilkes
Financial Conduct Authority, Enforcement and Market Oversight Division

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS AND GUIDANCE

1.
RELEVANT STATUTORY PROVISIONS

1.1.
The Authority’s operational objectives are set out in section 1B(3) of the Act (as
amended by the Financial Services Act 2012) and include the consumer protection
objective.

1.2.
Section 206(1) of the Act provides:

‘If the [Authority] considers that an authorised person has contravened a
requirement imposed on him by or under this Act… it may impose on him a
penalty, in respect of the contravention, of such amount as it appears
appropriate.’

2.
RELEVANT REGULATORY PROVISIONS

2.1.
In exercising its power to impose a financial penalty, the Authority has had regard
to the relevant regulatory provisions and policy published in the Authority’s
Handbook. The main provisions that the Authority considers relevant to this case
are set out below.

Principles for Businesses (Principles)

2.2.
The Principles are a general statement of the fundamental obligations of firms
under the regulatory system and are set out in the Authority’s Handbook. They
derive their authority from the Authority’s rule-making powers set out in the Act.
The relevant Principle is Principle 6 (Customers’ interests) which provides that:

‘A firm must pay due regard to the interests of its customers and treat them
fairly.’

Dispute Resolution: Complaints (DISP)

2.3.
The DISP Handbook sets out how complaints are to be dealt with by firms.

2.4.
Chapter 1 of the DISP handbook contains rules and guidance on how respondents
should deal with complaints promptly and fairly, including complaints that could
be referred to the ombudsman service.

2.5.
DISP 1.4.1R states:

‘Once a complaint has been received by a respondent, it must:

(1)
investigate the complaint competently, diligently and impartially, obtaining
additional information as necessary;

(2)
assess fairly, consistently and promptly:

(a)
the subject matter of the complaint;

(b)
whether the complaint should be upheld;

(c)
what remedial action or redress (or both) may be appropriate;

(d)
if appropriate, whether it has reasonable grounds to be satisfied
that another respondent may be solely or jointly responsible for the
matter alleged in the complaint;

taking into account all relevant factors;

(3)
offer redress or remedial action when it decides this is appropriate;

(4)
explain to the complainant promptly and, in a way that is fair, clear and
not misleading, its assessment of the complaint, its decision on it, and any
offer of remedial action or redress; and

(5)
comply promptly with any offer of remedial action or redress accepted by
the complainant.’

From 1 May 2011 until 1 September 2011 DISP 1.4.1R was identical to the above
save for DISP 1.4.1R(1) which read ‘investigate the complaint competently,
diligently and impartially.’

2.6.
The relevant guidance to DISP 1.4.1R is given in DISP 1.4.2G which provides:

‘Factors that may be relevant in the assessment of a complaint under DISP
1.4.1R(2) include the following:

(1)
all the evidence available and the particular circumstances of the
complaint;

(2)
similarities with other complaints received by the respondent;

(3)
relevant guidance published by the FCA, other relevant regulators, the
Financial Ombudsman Service or former schemes; and

(4)
appropriate analysis of decisions by the Financial Ombudsman Service
concerning similar complaints received by the respondent (procedures for
which are described in DISP 1.3.2AG).’

From 1 May 2011 until 1 April 2013 DISP 1.4.2G was identical to the above save
for DISP 1.4.2G(4) which read ‘appropriate analysis of decisions by the Financial
Ombudsman Service concerning similar complaints received by the respondent
(procedures for which are described in DISP 1.3.2AG)’ and the word ‘FSA’ which
was replaced by ‘FCA’ in DISP 1.4.2G(3).

2.7.
DISP 1.4.4R provides:

‘Where a complaint against a respondent is referred to the Financial Ombudsman
Service, the respondent must cooperate fully with the Financial Ombudsman
Service and comply promptly with any settlements or awards made by it.’

Handling PPI complaints

2.8.
Appendix 3 of DISP handbook sets out how a firm should handle complaints
relating to the sale of a payment protection contract by the firm which express
dissatisfaction about the sale, or matters related to the sale, including where
there is a rejection of a claim on the grounds of ineligibility or exclusion (but not
matters unrelated to the sale, such as delays in claims handling).

2.9.
DISP App 3.1.2G states that Appendix 3 of DISP handbook sets out how a firm
should assess a complaint in order to establish whether the firm's conduct of the
sale failed to comply with the rules.

2.10. DISP App 3.10.1E states that the evidential provisions in Appendix 3 of DISP

handbook apply in relation to complaints about sales that took place on or after
14 January 2005.

2.11. DISP App 3.2.1G provides:

‘The firm should consider, in the light of all the information provided by the
complainant and otherwise already held by or available to the firm, whether there
was a breach or failing by the firm.’

2.12. DISP App 3.2.6G provides:

‘The firm should take into account any information it already holds about the sale
and consider other issues that may be relevant to the sale identified by the firm
through other means, for example, the root cause analysis described in DISP App
3.4.’

2.13. DISP App 3.2.7G provides:

‘The firm should consider all of its sales of payment protection contracts to the
complainant in respect of re-financed loans that were rolled up into the loan
covered by the payment protection contract that is the subject of the complaint.
The firm should consider the cumulative financial impact on the complainant of
any previous breaches or failings in those sales.’

2.14. DISP App 3.3.8G provides:

‘The firm should not draw a negative inference from a complainant not having
kept documentation relating to the purchase of the policy for any particular period
of time.’

2.15. DISP APP 3.6.2E(5) and (9) provide:

‘In the absence of evidence to the contrary, the firm should presume that the
complainant would not have bought the payment protection contract he bought if
the sale was substantially flawed, for example where the firm:

(5)
did not, for an advised sale (including where the firm gave advice in a non-
advised sales process) take reasonable care to ensure that the policy was
suitable for the complainant’s demands and needs taking into account all
relevant factors, including level of cover, cost, and relevant exclusions,
excesses, limitations and conditions;

(9)
recommended a single premium payment protection contract without
taking reasonable steps, where the policy did not have a pro-rata refund,
to establish whether there was a prospect that the complainant would
repay or refinance the loan before the end of the term;…’

2.16. DISP App 3.7.2E provides:

‘Where the firm concludes that the complainant would not have bought the
payment protection contract he bought, and the firm is not using the alternative
approach to redress (set out in DISP App 3.7.7E to 3.7.15E) or other appropriate
redress (see DISP App 3.8) the firm should, as far as practicable, put the
complainant in the position he would have been if he had not bought any payment
protection contract.’

2.17. DISP App 3.7.3E provides:

‘In such cases the firm should pay to the complainant a sum equal to the total
amount paid by the complainant in respect of the payment protection contract
including historic interest where relevant (plus simple interest on that amount). If
the complainant has received any rebate, for example if the customer cancelled a
single premium payment protection contract before it ran full term and received a
refund, the firm may deduct the value of this rebate from the amount otherwise
payable to the complainant.’

Decision Procedure and Penalties Manual (DEPP)

2.18. Chapter 6 of DEPP, which forms part of the Authority’s Handbook, sets out the

Authority’s statement of policy with respect to the imposition and amount of
financial penalties under the Act.

The Enforcement Guide

2.19. The Enforcement Guide sets out the Authority’s approach to exercising its main

enforcement powers under the Act.

2.20. Chapter 7 of the Enforcement Guide sets out the Authority’s approach to

exercising its power to impose a financial penalty.