FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this notice, the Authority hereby imposes on HomeServe

Membership Limited (“HML”) a financial penalty of £30,647,400. This penalty is

in respect of breaches of Principles 3, 6 and 7 of the Authority’s Principles for

Businesses (“the Principles”) during the period 14 January 2005 to 27 October

2011 (“the Relevant Period”).

1.2.
HML agreed to settle at an early stage of the Authority’s investigation. HML

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 £43,782,058 on HML.

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2.
SUMMARY OF REASONS

2.1.
HML is an insurance intermediary, which advises on and arranges home

emergency and repairs insurance cover. HML failed to embed a robust culture

with adequate focus on compliance and treating customers fairly. In particular, it

incentivised volume over quality in sales and complaints handling through its

remuneration policy, and its senior management were insufficiently engaged with

compliance matters.

2.2.
The Authority has found that HML breached Principle 3 by failing to take

reasonable care to organise and control its affairs responsibly and effectively, with

adequate risk management systems. In particular:

(1)
during the period 1 February 2008 to 27 October 2011, HML failed to

ensure that its Board gave sufficient attention to compliance issues and

took adequate steps to address them, including but not limited to, failing

to review and react to compliance monitoring reports that raised serious

concerns such as mis-selling and which subsequently led HML, a year after

initial concerns had been raised, to suspend all telephone sales;

(2)
during the period 1 January 2008 to 27 October 2011, HML failed to ensure

that its senior management undertook adequate regulatory training, which

led to a lack of regulatory knowledge and a failure adequately to identify

and address issues that created a risk that customers may not be treated

fairly and contributed to a culture that placed more importance on

generating profits;

(3)
during the period 14 January 2005 to 27 October 2011, HML failed to

identify and address inappropriate bias within the remuneration structure

for the sales teams, which incentivised staff to increase the volume of

products sold, irrespective of the customer’s need for the product;

(4)
during the period 1 November 2008 to 27 October 2011, HML failed to

identify and address inappropriate bias within the remuneration structure

for the complaint handling teams, which incentivised staff to close as many

complaints as possible, meaning that there was a risk that complaints were

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not handled fairly and that customers did not receive appropriate redress;

and

(5)
during the period 14 January 2005 to 27 October 2011, HML failed to have

in place adequate IT software and carry out effective tests on its IT

systems, which meant that it failed to detect and remedy errors occurring

in pricing calculations and in checks for any duplication of insurance cover,

and resulted in 34,859 customers being overcharged and 8,796 customers

being charged for duplicate cover that they did not need.

2.3.
HML breached Principle 6 by failing to pay due regard to the interests of its

customers and treat them fairly with regard to complaints handling. The reason

for this is that during the period 13 January 2010 to 13 April 2011, HML failed to

have in place an effective customer complaint handling process, which meant that

it failed to investigate and resolve all customer complaints fairly, including failing

to offer 8,481 customers appropriate redress. Customers, for example, were not

always appropriately compensated for the failure of or delay by HML engineers in

attending their home, or reimbursed the full cost of having to call out an

independent engineer to deal with a home emergency, such as a plumbing

emergency in the middle of winter, which should have been resolved by HML.

Principle 7

2.4.
HML breached Principle 7 by failing to pay due regard to the information needs of

its clients and communicate information to them in a way which was clear, fair

and not misleading when conducting telephone sales. The reason for this is that

during the period 1 November 2006 to 27 October 2011, HML failed to provide

clear, fair and not misleading information to customers about two of its insurance

policies at the point of sale, which led to an estimated 69,000 customers being

mis-sold these policies. For example, sales agents at HML failed clearly and

adequately to explain the comparative price and coverage of these two policies.

2.5.
The Authority considers that the failings identified at HML were serious, systemic

and long running, extending across many key aspects of the business. The

Authority expects authorised firms to have a robust culture with adequate focus

on compliance and treating customers fairly. The Authority also considers that

HML’s failings were particularly serious given that a significant proportion of its

customers were of retirement age and therefore more vulnerable.

2.6.
Following a rapid expansion in the growth of its home emergency and repair

insurance business, HML developed a profit driven culture where profit targets

were met by taking advantage of existing customers in pursuit of sales. HML

accepted that it needed to restore its customer focus and move away from a

culture of putting profits before treating customers fairly. To date, HML has paid

approximately £12.9 million to affected customers by way of redress in respect of

the failings identified by the Authority, and is expected to pay a total of £16.8

million.

2.7.
HML took a number of remedial steps of its own volition. For example, it

voluntarily ceased new sales and marketing activity and also significantly

strengthened its Board. HML also co-operated proactively with the Authority’s

investigation.

3.
DEFINITIONS

3.1.
The definitions below 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.

“the Authority’s Handbook” means the Authority’s Handbook of rules and

guidance.

“Compliance Department” means the department responsible for compliance at

HML.

“CRC” means the Compliance and Risk Committee.

“Customer Relations Department” means the department at HML that dealt with

customer complaints.

“DEPP” means the Decision Procedure and Penalties Manual as set out in the

Authority’s Handbook.

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“DISP” means the Dispute Resolution: Complaints Sourcebook as set out in the

Authority’s Handbook.

“FOS” means the Financial Ombudsman Service.

“HML” means HomeServe Membership Limited.

“MI” means management information that is collected within the firm and used by

senior management to identify areas of concern and to support decision making.

“the New Penalty Regime” means the penalty regime which was effective on and

from 6 March 2010.

“the Old Penalty Regime” means the penalty regime which was effective prior to 6

March 2010.

“the Principles” means the Authority’s Principles for Businesses.

“the Products” means the Complete Cover Policy and the Combined Utilities Policy

products sold by HML.

“Quality Department” means the department at HML responsible for screening

calls to customers in respect of sales and complaints to ensure that they were

compliant with regulatory requirements.

“the Quality Pass Score” means the quality pass score of 87.5%.

“the Relevant Period” means the period from 14 January 2005 to 27 October

2011.

“SMT” means the Senior Management Team.

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).

“the 2009/2010 winter fast track process” means the complaint handling fast

track process in place during the period 13 January 2010 to 8 October 2010.

“the 2010/2011 winter fast track process” means the complaint handling fast

track process in place during the period 1 September 2010 to 13 April 2011.

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4.
FACTS AND MATTERS

HML Business, Management and Governance Structure

4.1.
HML is an insurance intermediary, which has been authorised by the Authority

since 14 January 2005. It is part of a group of companies and provides home

emergency and repairs cover, ranging from boiler and central heating to drainage

and plumbing cover. HML grew rapidly from the start of the Relevant Period and

as at 31 March 2012 had a total annual turnover of approximately £356 million.

4.2.
During the Relevant Period, HML sold approximately 12 million new policies and

had a customer base of between 2.3 million to 3.3 million. These policies were

sold through HML’s website, telephone sales, and appointed representatives.

Depending on the range of cover provided by HML, a policy could cost up to

£27.89 per month.

4.3.
During most of the Relevant Period, the Board at HML consisted of ten Board

Members (including two non-executives) and Board meetings took place

predominantly once every two months. The governance structure at HML also

included two Board appointed sub-committees. These were the Senior

Management Team (“SMT”) and the Compliance and Risk Committee (“CRC”).

4.4.
The CRC was created on 26 January 2008 and replaced the Compliance

Committee, which had been created in mid-2006. The CRC comprised seven of

the ten Board members (including one non-executive) and its responsibilities

included:

(1)
promoting a culture which encouraged good practice throughout HML with

regard to compliance and risk management;

(2)
considering major findings arising out of the compliance function and

management’s response to those findings;

(3)
defining HML’s policy for controlling and promoting the awareness of risk

management;

(4)
considering how HML was meeting its regulatory requirements; and

(5)
considering issues raised by internal and external auditors with a view to

monitoring the objectivity and credibility of HML’s reporting controls.

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4.5.
The SMT was set up on 23 January 2008 and comprised six of the executive Board

Members. Its responsibilities included:

(1)
strategic management;

(2)
identifying opportunities and challenges facing the organisation;

(3)
considering any significant issues arising from other committees of the

Board; and

(4)
discussing and agreeing the agenda for Board meetings.

4.6.
In September 2010, following an effectiveness and efficiency review by an

external consultancy group, HML made a series of cuts. This included the role of

Legal and Compliance Director ceasing to exist. Following this, another senior

member of the Compliance Department – who was not a member of the Board –

began to attend SMT meetings from October 2010 and Board meetings as an

observer from November 2010. By attending Board meetings as an observer

only, his role was limited simply to answering any queries which might have

arisen during those Board meetings. As an observer he had no formal input into

the Board meetings. HML has acknowledged that the Compliance Department

was not given ‘sufficient weight’ to raise serious issues such as poor sales

practices, and ensure its significance was understood.

Board effectiveness and lack of focus on compliance issues

4.7.
From 1 February 2008 there was no formal discussion at Board level of the

compliance monitoring report findings that were discussed during the quarterly

CRC meetings. Although the CRC sometimes provided a brief update to the Board,

it did not inform the Board about all key compliance issues that arose and which

were discussed during the CRC meetings. This meant that the three Board

members who were not also members of the CRC were not informed about

compliance issues. The Board packs included a copy of the CRC meeting minutes,

but they did not include copies of the compliance monitoring reports, even though

some of these reports raised serious concerns. One compliance monitoring

report dated 3 July 2009, for example, identified significant concerns with HML’s

Quality Department, which was responsible for screening calls to customers in

respect of sales and complaints to ensure that they were compliant with

regulatory requirements. The compliance monitoring report found that 21 out of

110 (19%) sales calls that had been reviewed by the Quality Department had

been inappropriately assessed. This included ten calls where the Quality

Department had failed to identify that the customer had been provided with

misleading information at the point of sale and consequently mis-sold a product.

The concerns identified indicated that there was a risk that some customers may

have been mis-sold insurance policies and/or not treated fairly. Despite the

seriousness of the concerns raised in this compliance monitoring report, it was not

included in the Board pack, nor was it discussed during the Board meeting.

4.8.
Although the majority of the Board members were also members of the CRC, the

three Board members that were not part of the CRC did not have the opportunity

to review the more detailed compliance related MI. This meant that significant

issues which required Board attention, such as sales agents providing customers

with misleading information, were discussed in CRC meetings but may not have

subsequently been raised and discussed at Board level.

4.9.
Discussions about compliance reports at Board level were limited and compliance

issues were not given sufficient weight. This meant that senior management did

not take appropriate action to manage compliance issues in a timely fashion.

4.10. Following the redundancy of the Legal and Compliance Director in September

2010, HML had no dedicated compliance representation on the Board. From 10

November 2010 the CRC began to submit a written report for discussion at Board

meetings following the quarterly CRC meetings. However, the Board still did not

have sufficient focus on compliance. Compliance monitoring reports were rarely

considered during Board meetings and they were not included as a matter of

course in the Board packs.

4.11. There were no criteria to determine when or why a particular compliance

monitoring report should be discussed at Board level. For example, compliance

monitoring reports into selling practices at HML dated 19 October 2010 and 29

March 2011 were not discussed by the Board, despite raising serious concerns

relating to treating customers fairly, poor sales techniques, providing customers

with misleading information and mis-selling. The 19 October 2010 compliance

report, for example, identified that information provided to HML customers during

certain combined up-sell calls was not as clear and as fair as it should have been,

resulting in the overall calls being deemed potentially misleading. From the outset

of the call, HML sales agents often disguised the true purpose of the call and

advised customers that they were calling in order to combine their existing policy

into one direct debit to make it easier for them, without clarifying that they would

also be offering additional policy enhancements at additional cost. The 29 March

2011 report identified similar concerns to those previously identified in the 19

October 2010 report. For example, a review of sales calls for that period

identified concerns about sales practices in respect of 57 out of 215 (26%) sales

calls. Specifically, in 13 of the 57 calls (23%) the sales agents gave misleading

price information at the point of sale and in 6 of the 57 calls (10%) the sales

agents failed sufficiently to establish that the product being sold was suitable for

the customer.

4.12. Following the 29 March 2011 report, the Board commissioned an independent

report to be carried out by a professional services firm. This report, dated 30

September 2011, identified the same issues as those in the compliance

monitoring reports dated 19 October 2010 and 29 March 2011. This was

considered by the Board and subsequently led HML, a year after initial concerns

had been raised, to suspend all telephone sales due to concerns about mis-selling.

This is discussed in more detail in paragraphs 4.56 to 4.61 below.

4.13. By 27 October 2011, HML had considerably strengthened its compliance focus,

including through the appointment of a new CEO and chair of the Compliance and

Risk Committee.

Inadequate complaint handling process

4.14. During the winter months of 2009/2010 and 2010/2011, extreme weather

conditions led to an increase in the volume of customers that claimed on their

HML home assistance insurance policy and an increase in the volume of

complaints received by the Customer Relations Department at HML. In order to

deal with the large volume of complaints, HML implemented a system whereby

certain customer complaints were handled using a fast track process. This fast

track process was in place from 13 January 2010 until 13 April 2011. Specifically,

the fast track process that was implemented during the 2009/2010 winter was

introduced on 13 January 2010 and remained in place until 8 October 2010. The

fast track process that was implemented during the 2010/2011 winter (which was

a modified version of the 2009/2010 winter fast track process), was introduced on

1 September 2010 and remained in place until 13 April 2011. This means there

was an overlap in the period that the 2009/2010 and 2010/2011 winter fast track

processes were in place.

The 2009/2010 winter fast track process

4.15. The complaints that were dealt with using the 2009/2010 winter fast track

process were about:

(1)
customers being unable to get through to HML to report a claim;

(2)
the failure by HML to deploy an engineer to a customer’s home;

(3)
the delay by an engineer in attending a customer’s home; and

(4)
the failure of an engineer to attend a customer’s home.

4.16. DISP 1.4.1R states that firms must investigate customer complaints competently,

diligently and impartially and offer redress to the customer if it is decided that

this is appropriate. However, under the fast track process that was implemented,

(1)
did not investigate these complaints at all and instead resolved them

simply by negotiating with the customer;

(2)
closed and recorded such complaints as justified (and therefore upheld),

and used a standard root cause code in order to identify/separate them;

(3)
issued a standard resolution letter to all complainants that were satisfied;

and

(4)
passed the complaint to a senior agent in instances where the complainant

was not satisfied.

4.17. If a complaint was passed to a senior agent or required an investigation in order

to be resolved, it was excluded from the fast track process.

4.18. For example, one of HML’s customers had originally made a claim against their

policy on 15 November 2009 following a plumbing issue at their home. The HML

engineer failed to attend the first appointment (for which the customer had taken

annual leave) and attended the second appointment two hours late. Although the

job was completed during the second appointment, the plumbing issue recurred

on Christmas Eve, 24 December 2009. Having contacted HML again, the

customer was informed that the HML engineer would not be able to attend the

property until five days later on 29 December 2009. Due to the severity of the

plumbing issue, the customer was forced to call an independent emergency

plumber who was able to resolve the problem at a cost of £160. The customer

contacted HML on 29 December 2009 to make a complaint and seek

reimbursement for the cost of the independent emergency plumber. In

accordance with the fast track process, HML simply wrote to the customer on 15

January 2010, stating that the adverse weather had affected their normal service

standards and enclosed a £50 cheque as a gesture of goodwill. HML also offered

a discount for the premium on the rest of the policy, which was due for renewal in

February 2010. The customer was advised that they would need to provide an

invoice. The complaint was then closed. HML did not, therefore, compensate the

customer for (i) the failure by the HML engineer to attend the first appointment

(ii) the two hour delay by the engineer in attending the second appointment or

(iii) the full cost of the independent emergency plumber that they were forced to

call out on Christmas Eve.

4.19. HML’s implementation of the 2009/2010 winter fast track process and its failure to

investigate all complaints in accordance with DISP 1.4.1R meant that some

customers that did complain did not receive appropriate redress and were not

treated fairly. Some customers, for example, were not appropriately

compensated for the failure of or delay by HML engineers in attending their home,

or reimbursed the full cost of having to call out an alternative engineer to deal

with a home emergency that should have been resolved by HML. HML’s

marketing material in relation to its insurance products stated that it will provide

customers with protection and peace of mind. For example, one piece of

marketing material relating to boiler breakdown cover stated ‘With your boiler out

of action, not only could you be without heating, but you could also face a search

for a reliable heating engineer, plus repairs can be expensive.’ It then invited

customers to purchase insurance to ‘ensure peace of mind’. Another piece of

marketing material relating to plumbing and drainage cover similarly stated

‘Without cover, not only could you be left searching for a plumber at short notice,

but you would also have to cover the cost of any repairs.’ However, HML’s failure

to resolve complaints fairly meant that not only did some customers not receive

protection and peace of mind, they also suffered additional financial detriment.

HML has since contacted approximately 1,300 customers which it considers may

have had their complaints handled using the 2009/2010 winter fast track process,

of which 82 requested that their complaint be re-opened. From these 82, HML

has paid a total of £6,887 in redress to 63 customers that suffered detriment

because their complaints were not investigated fairly in accordance with DISP

The 2010/2011 winter fast track process

4.20. The complaints that were dealt with using the 2010/2011 winter fast track

process were slightly different to the complaints that were dealt with using the

2009/2010 winter fast track process. Specifically they related to:

(1)
customers being unable to get through to HML to report a claim;

(2)
the failure by HML to deploy an engineer to a customer’s home;

(3)
the failure of or delay by an engineer in attending a customer’s home; or

(4)
failures by HML to keep customers informed either about the progress of

their claim and/or the deployment or attendance of an engineer at their

home.

4.21. These types of claims-related complaints were the majority of complaints received

during the 2010/2011 winter.

4.22. The 2010/2011 winter fast track process involved two approaches. These are set

out below.

The first approach

4.23. The first approach involved simply issuing an apology to the customer. HML

considered by the time the complaint came to be investigated, customer

complaints concerning the issues set out at paragraph 4.20 above, could only be

remedied by issuing an apology to the customer. Therefore, instead of

investigating the complaints in accordance with DISP 1.4.1R, the complaint

handler would:

(1)
close the complaint with a letter of apology;

(2)
ask the customer to get back in touch if they had any other causes of

concern (for which a telephone number was provided); and

(3)
provide the customer with information about their right to refer the

complaint to the FOS.

4.24. On 28 February 2011, the criteria set out in paragraph 4.20, which determined

which complaints should be resolved just by issuing a letter of apology, evolved to

include all types of complaints, except those relating to poor workmanship,

damage to property, incorrect diagnosis, administration issues and secondary

aspects. This meant a much broader range of complaints were closed by HML

without conducting an investigation, which was again contrary to the

requirements in DISP 1.4.1R.

4.25. Where the complaint was more complex or contained additional information that

needed further action, it was excluded from this fast track process and was

investigated in accordance with the normal investigation process in place at HML.

The second approach

4.26. The second approach ostensibly involved conducting a ‘limited investigation’ into

the customer’s complaint. If the complaint met the criteria for the fast track

process as set out at paragraph 4.20 above, but the complaint handler considered

that some redress may be required, the complaint handler simply contacted the

customer that had complained in order to confirm the reason for the complaint

and quickly agree the appropriate redress (to a maximum value of £200). This

was called the ‘limited investigation’ process although there was in fact no

investigation of the specific detail of these complaints at all. Again this was

contrary to the requirement in DISP 1.4.1R, which required a more detailed

investigation than that which was conducted under this approach, and meant that

customers were not treated fairly as they may not have received the appropriate

amount of redress (for example, to reimburse them for the cost of having to call

out an alternative engineer).

4.27. A review conducted by HML identified that the fast track process was also

inappropriately applied to complaints that fell outside the criteria set out in

paragraph 4.20 above, such as complaints that related to mis-selling. This was

due to confusion by the complaints-handling staff over which process to use and

also inadequate training. Some complaint handlers considered that their job was

purely to send an apology letter to as many complainants as possible on each

shift, rather than consider whether redress might be appropriate.

4.28. The Quality Department was not adequately briefed on the fast track process to

allow for effective oversight and monitoring of the way in which complaints were

being handled, and the sampling by the Quality Department of complaints-

handling activity was not adequately risk-based or increased during the

implementation of the process.

4.29. During the period 1 September 2010 to 13 April 2011, HML received

approximately 50,200 customer complaints, of which approximately 20,589

(41%) were complaints which met the criteria set out in paragraph 4.20 and/or

paragraph 4.24 above, and were at higher risk of being handled using the

2010/2011 winter fast track process. The fast track process was implemented in

order to manage the significant complaint volumes being received during the

severe weather conditions. HML has admitted that the application of the fast track

process during this winter meant management focused on reducing complaint

numbers quickly as opposed to treating customers fairly.

4.30. HML’s failure to investigate all complaints in accordance with DISP 1.4.1R meant

that some customers that did complain did not receive appropriate redress and

were not treated fairly. Some customers, for example, were again not

appropriately compensated for the failure of or delay in HML engineers attending

their home, or were not reimbursed the full cost of having to call out an

alternative engineer to deal with a home emergency that should have been

resolved by HML. Instead of implementing a fast track process which was

designed to close certain complaints as quickly as possible, HML should have

investigated all customer complaints received during the 2010/2011 winter in

accordance with DISP 1.4.1R, and offered customers appropriate redress. HML

has since carried out a customer contact exercise and has paid £1,331,239 to

8,418 customers by way of redress for the complaint-handling failures relating to

the 2010/2011 winter fast track process.

Inappropriate remuneration structure and incentive schemes for sales

and complaint handling

4.31. The remuneration schemes and payment structures that were in place at HML for

sales agents evolved during the period 14 January 2005 to 27 October 2011, and

were complex and different for each of the sales departments at HML, which

included for example outbound sales, inbound sales, outbound retention and

inbound retention. Sales agents were rewarded predominantly on the basis of

volume of products sold rather than quality of sales (for example, ensuring that a

particular product sold was suitable for a customer). An internal report by HML

dated 26 April 2013 stated that its sales teams ‘historically were heavily

incentivised, which may have created a desire to achieve. This achievement may

have taken the form of setting up duplicated policies in order to gain incentive

bonuses’.

4.32. Sales agents were paid commission for sales that they generated. For example,

reward in the outbound sales team was determined by a ‘sales per hour’ rate for

each different insurance product (covering, for example, electrics, plumbing, or

gas supply pipe) and with different rates depending on whether that product was

sold to new or existing customers. A sales agent could earn up to £20

commission per product sold, depending on their ‘sales per hour’ rate (ranging

from 0.2 to 2.5) on top of their basic salary of £13,500. For example, if an

outbound sales agent sold five products in a seven hour working day, and the sale

of each of those products was rewarded with £12.50 commission, the sales agent

would earn £62.50 a day in commission, equating to £1,250 per month, which

was 9% of their basic salary. Top performers in sales would take home an

additional £1,400 per month in commission (i.e. more than doubling their basic

salary). The ‘sales per hour’ rate also meant that sales agents were incentivised

to spend less time on the phone with each customer with the risk that all relevant

information about the product may not be given to a customer. The different

rates per product also meant that there was a risk that sales agents were

incentivised to sell more of the products that gained more commission,

irrespective of a customer’s need.

4.33. Sales agents could have 20% of their monthly commission deducted if they failed

to achieve a monthly quality pass score of 87.5% (the “Quality Pass Score”). In

order to meet the monthly Quality Pass Score, sales agents had to pass call

screenings conducted by the Quality Department. Approximately 5% of total

sales calls were screened by the Quality Department. The call screenings included

an assessment of whether the sales agent had established that a customer was

eligible for the cover, whether the product was suitable for the customer, whether

the correct description of the product had been given (outlining any exclusions or

limitations), whether the correct cost of the product had been given and whether

the customer had been treated fairly. The number of calls screened for each sales

agent depended on a risk rating process, which became more stringent from 2011

and depended on whether a sales agent was deemed to be high, medium or low

risk (determined by the quality performance, sales performance, number of

justified complaints and number of cancellations from the previous month). For

example, if a sales agent was deemed high risk, the Quality Department would

screen ten of their calls a month. A medium risk sales agent would have six of

their calls screened and a low risk sales agent would only have two of their calls

screened. Sales agents received a score for each call that was screened and the

overall score for the month was based on the average of all the sales agent’s

scores.

4.34. Although, as set out above, a sales agent could have 20% of their commission

deducted if they failed to achieve the Quality Pass Score, they were still eligible to

receive the remaining 80% of their commission regardless of the nature and/or

extent of the failure. This meant that even if a sales agent only achieved a 30%

monthly quality score, they were still rewarded with up to 80% commission.

There was no incentive, therefore, for sales agents to improve the quality of their

sales, if they believed they were not going to hit the Quality Pass Score for the

month. This was, therefore, ineffective as a way of ensuring agents maintained

appropriate standards.

4.35. If sales agents exceeded their sales targets, then depending on which sales team

they worked in, the remuneration structure varied. If, for example, a sales agent

worked in the outbound sales team, they could achieve an uplift in the amount of

commission they received for all sales made, if they exceeded their sales target

(which were set for different sales campaigns and for different products). The

amount of the uplift received per sale increased incrementally until the sales

agent reached a target of 130%, at which point the uplift was capped. So a sales

agent in the outbound sales team could receive an additional 65p per sale,

(irrespective of the type of product sold or commission payable) if they met the

130% sales target. Sales agents in the outbound sales team could receive the

maximum uplift of 65p per sale, even if they did not meet the Quality Pass Score.

This meant that by increasing the volume of products sold, sales agents could

compensate for the loss of the 20% commission for failing to meet the Quality

Pass Score. Sales agents, therefore, considered that achieving the Quality Pass

Score, and thereby avoiding the 20% commission being deducted, was a ‘quality

bonus’ on top of the commission already earned for exceeding their sales target.

HML therefore incentivised sales agents to exceed their sales targets, irrespective

of customers’ need for the product or the quality of the sales call.

4.36. Commission earned by sales agents was clawed back if a policy that had been

sold by them was cancelled within 28 days. Further, if a justified complaint was

made against a sales agent, then £25 would be deducted from that sales agent’s

total commission. However, even if a sales agent received numerous justified

complaints, resulting in a large deduction of their commission, there was no cut-

off point whereby all the commission was forgone for a specific number of

complaints. Even large numbers of justified complaints may be considered to

have a negligible effect when sales volumes could result in high sales commission.

For example, eight justified complaints would only result in £200 being deducted

from a sales agent’s commission. If that sales agent was a top performer earning

£1,400 a month in commission, a deduction of £200 would not be significant. For

a top performer to lose all their commission they would need to have 56 justified

complaints per month made against them.

4.37. The culture at HML was therefore influenced by the remuneration structures which

led to sales agents being rewarded for selling as much as possible with a risk,

which HML failed to manage, that they would do so without paying due attention

to the quality of those sales. HML failed to identify that the remuneration

structures in place led to the risk of sales agents increasing the number of

products sold in order to earn more commission, irrespective of a customer’s need

for the product.

Complaint handling

4.38. HML incentivised complaint handlers to close as many complaints as possible,

without placing enough importance on the quality of how those complaints were

handled. A focus on quality in handling complaints includes ensuring that

complaints are investigated competently, diligently and impartially and offering

redress to the customer if it is decided that this is appropriate.

4.39. Complaint handlers at HML usually had a productivity target of closing between 3

and 22 complaints a day (depending on the type of complaint being handled) and

earned a basic salary of approximately £14,000. In order to motivate complaint

handlers to meet and/or exceed their targets, they were awarded bonuses for

doing so. Different remuneration structures and incentive schemes were

introduced during the period from 1 November 2008 to 27 October 2011, which

are discussed in more detail below.

Remuneration structure in place from November 2008 to March 2010

4.40. During the period 1 November 2008 to 31 March 2010, complaint handlers were

awarded monthly bonuses, which were capped at a maximum of £357 a month.

The monthly bonuses were based on complaint handlers meeting their

productivity target. If complaint handlers failed to meet their productivity target

then they did not receive any bonus, although the majority of complaint handlers

regularly achieved and exceeded their targets and therefore received a bonus.

Complaint handlers also had to pass quality checks carried out by the Quality

Department, which were intended to ensure that complaints were dealt with

appropriately. This included checking whether or not the complaint had been

investigated thoroughly and whether the appropriate resolution had been reached

for the customer. The amount of bonus that complaint handlers could receive was

partly dependent on their quality score, which was expressed as a percentage of

the total number of closed complaints reviewed that were “passed” by the Quality

Department. Quality Department agents usually had to review five complaints

per complaint handler per month.

4.41. Whilst the remuneration structure in place during this period had a quality

assessment component, complaint handlers would still receive a bonus payment

(albeit a lower one) even if they received a low quality score. For example, one

complaint handler that had a monthly productivity target of closing 118

complaints exceeded this target and was eligible to receive £357 by way of bonus.

This was reduced due to failures in his complaint handling. However, even

though he only achieved a quality score of 33% he still received a bonus payment

of £119. As long as complaint handlers were able to meet their productivity

target, they would only lose their entire bonus if they achieved a 0% quality

score.

4.42. Accordingly, HML did not adequately incentivise complaint handlers to ensure that

in dealing with customer complaints, they always treated customers fairly by

investigating the complaints thoroughly and reaching the appropriate resolution

for the customer. The incentive scheme in place, therefore, motivated complaint

handlers to achieve their productivity targets at the expense of treating customers

fairly.

Remuneration structure in place from April 2010 until October 2011

4.43. In April 2010 HML introduced a different remuneration structure for complaint

handlers. In addition to their basic salary, complaint handlers at HML could also

receive weekly bonuses of £50 subject to achieving:

(1)
100% productivity (productivity being the total number of complaints that

complaint handlers were required to close, which was between 3 and 22

per day depending on the type of complaint being handled);

(2)
the Quality Pass Score (being 87.5%); and

(3)
less than 1% re-opened complaints.

4.44. A further £50 bonus could also be received if the complaint handlers achieved the

above measures in each of the four weeks for the month.

4.45. If the complaint handlers exceeded their productivity targets, subject to meeting

the Quality Pass Score, from July 2011 onwards, they could also receive an

additional productivity bonus. The additional productivity bonus grew

incrementally until the complaint handler reached a productivity rate of 130%, at

which point it was capped (at £50). Whilst the reward structure meant that there

was a quality assessment component, the screening criteria was not tailored

appropriately towards particular areas of risk. For example, the Quality

Department did not carry out additional checks on the complaints that exceeded

the productivity target, which would have been higher risk.

Additional incentive schemes introduced during the 2009/2010 and 2010/2011

winters

4.46. During the period that the 2009/2010 winter fast track process was in place, HML

introduced an incentive scheme entitled “£s for closures” which applied to

complaints that were closed outside normal working hours, whilst complaint

handlers were working overtime. For example, a complaint handler could earn

£110 for closing five complaints outside normal working hours, and £240 for

closing ten complaints. The amount of complaints closed outside normal working

hours could be spread across more than one day. This again incentivised

complaint handlers to close as many complaints as possible for an additional

financial reward. Quality Department agents also assisted in handling and closing

complaints during the period that the 2009/2010 winter fast track process was in

place. However, the Quality Department did not conduct additional reviews in

respect of the complaints closed by the Quality Department agents under this

incentive scheme.

4.47. During the period that the 2010/2011 winter fast track process was in place, HML

introduced another reward scheme. Complaint handlers dealing with complaints

under the 2010/2011 winter fast track process were usually required to close six

complaints per day. However, under the new rewards scheme, complaint

handlers had significantly higher targets, and were required to close between 15

and 30 complaints per day. In order to motivate complaint handlers to hit the

higher volume targets, HML also offered incentives such as prizes worth up to

£200, computer games consoles, holiday vouchers, early finishes from work and

extra days off as a reward.

4.48. Although the Quality Department carried out checks on a sample of closed

complaints in order to ensure that complaints were being dealt with appropriately,

an internal report by HML dated 27 April 2011 about complaint handling during

the 2010/2011 winter identified that the sampling of complaint handler activity

was not risk based. As mentioned above, the Quality Department agents had to

review five complaints per complaint handler per month across all of their activity,

but this approach did not reflect the increased risk and targets associated with the

implementation of the fast track process in the winter of 2010/2011. So although

complaint handlers had to meet significantly higher targets and close between 15

and 30 complaints per day, which amounted to 660 complaints per month,

Quality Department agents were still only reviewing five complaints per month,

per complaint handler. Complaint handlers, therefore, did not believe that the

quality of their work was being adequately reviewed and placed less importance

on closing complaints appropriately and treating customers fairly. Further, the

internal report dated 27 April 2011 identified that the Customer Relations

Department, within which sat the complaint handling teams, had scored

consistently below the targeted Quality Pass Score. However, no feedback had

been provided to enable the Customer Relations Department to improve its

performance and complaint handlers did not face any repercussions for

consistently failing to meet the Quality Pass Score.

4.49. In addition, the checks carried out by the Quality Department did not determine

whether or not complaint handlers would receive the rewards offered as an

incentive to close more complaints. HML, for example, did not require complaint

handlers to make up any time for complaints that they had personally closed

inappropriately and for which they had received additional time off, so complaint

handlers did not suffer any consequences for not closing complaints appropriately.

This led to complaint handlers inappropriately closing complaints to gain time off.

The incentive to increase the volume of complaints closed led to complaint

handlers applying the 2010/2011 winter fast track process to other categories of

complaints which did not fit the fast track process criteria as set out in paragraphs

4.20 and 4.24 above. They did this in order to increase the volume of complaints

being closed in a shorter time period, thereby receiving time off and enhanced

rewards.

4.50. HML failed to identify that both the monetary and non-monetary incentives

offered to complaint handlers and the remuneration structures in place during the

period 1 November 2008 to 27 October 2011 incentivised complaint handlers to

close complaints inappropriately in order to meet or exceed targets and earn

bonuses and other rewards. As a result of this failure, there was a risk that

customers that did complain did not receive appropriate redress and were not

treated fairly.

4.51. As at September 2011, HML was upholding approximately 36% of complaints

made to it. The FOS was then overturning approximately 56% of HML’s rejected

decisions, which was a very high overturn rate. This indicates that the risk

referred to above crystallised as a result of HML’s weak complaint handling

process, which was caused in part by the bias in the remuneration structures and

incentives in place at HML.

Inadequate IT systems (Pricing error and Duplicate cover)

Pricing error

4.52. Between November 2006 and October 2011, HML sold two products that were

very similar in nature and provided insurance cover for multiple elements such as

drainage, plumbing leaks and electrical wiring all under one policy. These two

products were called the Complete Cover Policy and the Combined Utilities Policy

(together “the Products”). The Products were sold both to new customers and to

existing customers by way of an upgrade from an existing policy. Customers who

upgraded should have benefitted from a reduction to allow for premiums already

paid on their existing policy. However, from 30 August 2007, an IT system coding

error at HML meant that customers who upgraded to one of the Products did not

receive the appropriate reduction and were consequently overcharged. This error

affected customers’ premiums for the first year of the policy.

4.53. HML did not carry out effective tests on its IT systems. This meant that HML

failed to prevent and/or detect the IT system coding error for a period of over four

years, which led to 34,859 customers suffering detriment as a result of being

overcharged. HML has since paid £558,674 to these customers by way of redress.

Duplicate cover

4.54. During the period 14 January 2005 to 27 October 2011, the IT software

programme at HML, which was intended to prevent overlaps in cover, failed to do

so completely and led to some customers being sold multiple insurance policies,

which resulted in an overlap in cover. This meant that customers paid twice for

insurance cover, on which they could only claim once. The IT software

programme was designed to check for and identify repeat occurrences of

addresses and/or customer names but due to limitations of the programme,

duplicates were not identified if the names and/or addresses had been entered

inconsistently, either because of the use of abbreviations in addresses such as ‘St’

in place of ‘Street’, the use of a house name, or the use of a customer’s initial

instead of their full name.

4.55. HML failed to have in place an adequate IT software programme which it used for

the sale of its insurance policies. It also failed to carry out effective tests on its IT

systems, which would have identified the error in this IT software programme.

HML’s failure to prevent and/or detect this error led to 8,796 customers suffering

detriment as a result of being charged for duplicate cover. HML has since paid

£918,210 to these customers by way of redress.

Poor sales practices in relation to the Products

4.56. As referred to in paragraph 4.52 above, the Products were sold to both new

customers and to existing customers by way of an upgrade from an existing HML

policy. They were also typically sold over the telephone. However, the Products,

which provided cover for multiple elements and contained numerous exclusions

and detailed terms and conditions, were very complex, and should have been

explained clearly and carefully when sold to customers over the telephone. Prior

to being sold either policy and in order to understand the scope of the cover that

was being provided, customers should have been given clearer information by

HML about both the exclusions, and the terms and conditions that formed part of

the policies.

4.57. In two internal reports dated 19 October 2010 and 29 March 2011 about the

quality of its telephone sales, HML identified that there were significant issues

regarding the sale of the Products. For example, HML identified that there was a

lack of clarity in a substantial number of calls regarding the disclosure of price.

Following the 29 March 2011 report, the Board commissioned a further

independent report to be carried out by a professional services firm. This report,

dated 30 September 2011, about the quality of HML’s telephone sales also

identified significant issues with regard to the sale of one of the Products, the

4.58. For example, the professional services firm reviewed 97 calls where a Complete

Cover Policy was sold and identified that in 37 (38%) of the calls, there was either

a lack of clarity, or no comparison at all between the premium of a customer’s

existing HML policy and the premium of the Complete Cover Policy. Customers

were consequently prevented from comparing the premium of the Complete Cover

Policy with their existing policy which provided similar cover, and were therefore

prevented from making an informed decision about whether they needed the

4.59. In 17 of the 97 calls (17%) the policy was sold on the basis that the customer

could cancel the policy at a later date, and in 16 of the 97 calls (16%), sales

agents encouraged customers that were having difficulties understanding the

product to agree to have the policy set up anyway and then to read through the

documentation and call back post-sale if they had any queries or wished to

cancel. Also, the professional services firm identified that 28 of the 97 calls

(29%) were rushed (which may have been driven by the sales targets referred to

above), meaning that complaint handlers spoke too quickly when explaining the

product. This limited the ability of the customer to engage and understand the

full features of the product, including the benefits, exclusions and cost.

Conversations with customers should be clear and articulate to ensure that

customers understand all the features of the product, and do not feel pressurised

to purchase a product without feeling fully informed.

4.60. Following the concerns identified by the professional services firm in respect of

the Complete Cover Policy, HML acknowledged there were similar concerns with

the Combined Utilities Cover (the other of the two Products), which was a similar

product with a similar sales process. The poor sales practices employed by HML in

relation to the sale of the Products led to customers being mis-sold insurance

cover because they did not understand the features of the Products, the cost or

the extent of insurance cover that they were purchasing.

4.61. Even though the issues in respect of the sale of the Products were identified by

three different reports, the first of which was in 19 October 2010, it was not until

October 2011 that HML decided to suspend telephone sales of the Products. HML

subsequently suspended telephone sales in respect of all products on 28 October

2011 following challenge from the Authority.

4.62. As a result of HML’s failure to have regard to the information needs of its

customers and communicate information to them about the Products in a way

which was clear, fair and not misleading at the point of sale, customers purchased

inappropriate insurance cover that they did not need or for which they were not

eligible. HML is in the process of compensating customers that were mis-sold and

currently estimates that it will pay affected customers a total of £14.03 million.

Lack of regulatory training

4.63. There was a widespread lack of regulatory knowledge amongst HML’s senior

management team. Despite HML having an Approved Persons Training and

Competence Regime in place which required each Approved Person to take

responsibility for their own regulatory training, it failed to ensure that its senior

management undertook appropriate regulatory training. Specifically, regulatory

training provided to senior management was at best, limited, ad hoc and

dependent on the individual, but more often non-existent. Consequently,

regulatory risks were not understood by some senior managers and the objectives

that regulation seeks to achieve, such as treating customers fairly, were neither

ingrained in HML’s culture, nor considered by the senior management team to be

as important as achieving profit targets.

4.64. HML acknowledges that it developed a profit driven culture where profit targets

were met by taking advantage of existing customers in pursuit of sales, and lost

its customer focus. Further, during the 2010/2011 winter period, the Customer

Relations Department requested additional resource to handle the large volume of

complaints that was being received by HML. Specifically, the Customer Relations

Department suggested the temporary redeployment of some sales agents to the

Customer Relations Department to assist with reviewing and resolving complaints.

However, senior management considered that meeting sales targets was more

important than resolving customer complaints and the Customer Relations

Department was denied any additional resource. In order to deal with the large

volume of complaints, HML instead implemented the fast track process set out in

paragraphs 4.20 to 4.30 above, which meant that some customer complaints

were not investigated in accordance with DISP 1.4.1R. Consequently, some

customers that did complain did not receive appropriate redress and were not

treated fairly.

4.65. The Authority considers, and HML acknowledges, the lessons learned from a past

Skilled Person Report into its governance, risk and control mechanisms, dated 29

May 2007 had not been fully embedded. The errors identified by the Skilled

Person Report in 2007 in relation to HML’s lack of regulatory awareness have been

repeated, illustrating that senior management had not embedded the importance

of treating customers fairly and compliance with regulatory requirements into

HML’s culture as it should have done.

4.66. This lack of regulatory knowledge was made clear in interviews with the

Authority. For example, a member of senior management admitted to being

confused about the difference between controlled functions. They were also

unclear about the controlled function they personally held during a certain period,

or what the corresponding responsibilities were. Another senior manager

admitted that they had been shocked when they did finally receive some

regulatory training and realised how little training they had received to date in

comparison to what they needed. Furthermore, the training and competency

records of senior management demonstrated the inadequacy of the training

received.

4.67. HML’s failure to understand the implications of being a regulated firm meant that

it addressed risks that might have an effect on treating customers fairly from a

commercial and profit perspective, without recognising the regulatory impact of

doing so. For example, senior management at HML were reluctant to address

such risks, if there was a cost implication in doing so, and/or if it conflicted with

the profit targets they had to achieve.

4.68. HML relied on the Compliance Department to ensure that it complied with

regulatory matters. However, the general lack of regulatory knowledge amongst

the senior management team meant that the Compliance Department did not

have sufficient weight within HML to raise the severity of the regulatory issues it

identified. Consequently, its findings, which were set out in the compliance

monitoring reports, were not taken seriously. A report dated February 2012

refers to the fact that the initial reaction to the compliance monitoring reports

‘was to discredit them, and if that did not work, to then discredit the person who

had done the work.’ This problem was exacerbated when HML made the Legal

and Compliance Director redundant in September 2010, as it meant that the

Compliance Department no longer had a dedicated representative on the Board.

4.69. During the period 1 January 2008 to 27 October 2011, HML failed to ensure that

its senior management undertook adequate regulatory training. As a result of

this failure, there was a widespread lack of regulatory knowledge, which meant

that HML failed adequately to identify and address regulatory risks.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Final Notice are referred to in Annex A.

5.2.
On the basis of the facts and matters described above, the Authority considers

that HML breached Principle 3 by failing to take reasonable care to organise and

control its affairs responsibly and effectively, with adequate risk management

systems. In particular:

(1)
during the period 1 February 2008 to 27 October 2011, HML failed to

ensure that the Board gave sufficient attention to compliance issues and

took adequate steps to address them, including but not limited to, failing

to review and react to compliance monitoring reports that raised serious

concerns such as mis-selling and which subsequently led HML, a year after

initial concerns had been raised, to suspend all telephone sales

(paragraphs 4.1 to 4.13);

(2)
during the period 1 January 2008 to 27 October 2011, HML failed to ensure

that its senior management undertook adequate regulatory training, which

led to a widespread lack of regulatory knowledge and a failure adequately

to identify and address issues that created a risk that customers may not

be treated fairly and contributed to a culture that placed more importance

on generating profits (paragraphs 4.63 to 4.69).

(3)
during the period 14 January 2005 to 27 October 2011, HML failed to

identify and address the inappropriate bias within the remuneration

structure for the sales teams, which incentivised staff to increase the

volume of products sold irrespective of the customer’s need for the product

(paragraphs 4.31 to 4.37);

(4)
during the period 1 November 2008 to 27 October 2011, HML failed to

identify and address the inappropriate bias within the remuneration

structure for the complaint handling teams, which incentivised staff to

close as many complaints as possible, meaning that there was a risk that

complaints were not handled fairly and that customers did not receive

appropriate redress (paragraphs 4.38 to 4.51); and

(5)
during the period 14 January 2005 to 27 October 2011, HML failed to have

in place adequate IT software and carry out effective tests on its IT

systems, which meant that it failed to detect and remedy errors occurring

in pricing calculations and in checks for any duplication of insurance cover,

and resulted in 34,859 customers being overcharged and 8,796 customers

being charged for duplicate cover that they did not need (paragraphs 4.52

to 4.55).

5.3.
On the basis of the facts and matters described in paragraphs 4.14 to 4.30 above,

the Authority considers that HML breached Principle 6 by failing to pay due regard

to the interests of its customers and treat them fairly with regard to complaints

handling. The reason for this is that during the period 13 January 2010 to 13

April 2011, HML failed to have in place an effective customer complaint handling

process. Instead of investigating all customer complaints competently, diligently

and impartially and offering customers redress if appropriate in accordance with

DISP 1.4.1R, HML implemented a fast track process which was designed to close

complaints as quickly as possible. HML’s failure to investigate and resolve all

customer complaints in accordance with DISP 1.4.1R meant that some customers

that did complain did not receive appropriate redress and were not treated fairly.

Principle 7

5.4.
On the basis of the facts and matters described in paragraphs 4.56 to 4.62 above,

the Authority considers that HML breached Principle 7 by failing to pay due regard

to the information needs of its clients and communicate information to them in a

way which is clear, fair and not misleading. The reason for this is that during the

period 1 November 2006 to 27 October 2011 HML failed to provide clear, fair and

not misleading information to customers about the Products at the point of sale.

For example, sales agents at HML failed clearly and adequately to compare the

cost of a customer’s existing cover against the alternative cover available under

the Products. This led to customers being mis-sold the Products because they did

not understand the cost or the extent of the insurance cover that they were

purchasing.

6.
SANCTION

6.1.
The Authority has decided to impose a financial penalty of £43,782,058 (reduced

to £30,647,400 after a 30% discount for early settlement) on HML because of the

failings outlined above.

6.2.
The misconduct took place to a significant extent both before and after 6 March

2010. As set out at paragraph 2.7 of the Authority’s Policy Statement 10/4, when

calculating a financial penalty where the conduct straddles penalty regimes, the

Authority will have regard both to the penalty regime which was effective before 6

March 2010 (“the Old Penalty Regime”) and the penalty regime which was

effective from 6 March 2010 (“the New Penalty Regime”).

6.3.
The Authority has adopted the following approach:

(1)
calculated the financial penalty for HML’s misconduct from 14 January

2005 to 5 March 2010 by applying the Old Penalty Regime to the

misconduct;

(2)
calculated the financial penalty for HML’s misconduct from 6 March 2010 to

27 October 2011 by applying the New Penalty Regime to the misconduct;

and

(3)
added the penalties calculated under sub-paragraphs (1) and (2) to

produce the total penalty.

Financial penalty under the Old Penalty Regime

6.4.
The Authority’s policy on the imposition of financial penalties relevant to the

misconduct prior to 6 March 2010 is set out in Chapter 6 of the version of DEPP

that was in force prior to 6 March 2010. All references to DEPP in this section are

references to that version of DEPP. In determining the appropriate level of

financial penalty the Authority has also had regard to Chapter 7 of the

Enforcement Guide.

6.5.
The period of HML’s breach for the purposes of calculating the financial penalty

under the Old Penalty Regime is the period from 14 January 2005 to 5 March

2010.

30

6.6.
The Authority will consider the full circumstances of each case to determine

whether a financial penalty is appropriate. DEPP 6.5.2G sets out a non-

exhaustive list of factors that may be relevant in determining the level of a

financial penalty.

6.7.
The Authority considers that the following factors are particularly relevant to this

case.

Deterrence (DEPP 6.5.2G(1))

6.8.
The financial penalty will deter HML from further breaches of regulatory rules and

Principles. In addition it will promote high standards of regulatory conduct by

deterring other firms from committing similar breaches and demonstrating

generally the benefit of compliant behaviour.

The nature, seriousness and impact of the breach (DEPP 6.5.2G(2))

6.9.
In determining the appropriate level of financial penalty, the Authority has had

regard to the seriousness of the breaches, including the nature of the

requirements breached, the number and duration of the breaches and whether

the breaches revealed serious or systemic weaknesses of the management

systems or internal controls.

6.10. The Authority considers HML’s breaches to be serious because they:

(1)
placed all of its customers at risk of being treated unfairly;

(2)
led to some customers being mis-sold insurance policies;

(3)
revealed systemic weaknesses in its procedures, management systems and

internal controls in relation to several fundamental parts of its business,

including compliance, management, sales and complaint handling;

(4)
incentivised staff inappropriately, which led to a culture at the firm of

pursuing profits to the detriment of treating customers fairly; and

(5)
persisted over a significant period of time (with approximately five years

and two months falling within the Old Penalty Regime).

The size, financial resources and other circumstances of the firm (DEPP

6.11. In determining the appropriate level of the financial penalty the Authority has

considered HML’s size and financial resources. There is no evidence to suggest

that HML is unable to pay the financial penalty.

Conduct following the breach (DEPP 6.5.2G(8))

6.12. The Authority recognises the following factors.

(1)
HML has been open and co-operative with the Authority’s investigation and

has worked with the Authority to ensure early resolution of the matter; and

(2)
remedial steps have been taken by HML to identify whether customers

suffered a loss as a result of the breaches, and compensate them where

they have.

Disciplinary record and compliance history (DEPP 6.5.2G(9))

6.13. HML has not been the subject of previous disciplinary action by the Authority.

Other action taken by the Authority (DEPP 6.5.2G(10))

6.14. In determining the level of financial penalty, the Authority has taken into account

penalties imposed by the Authority on other authorised persons for similar

behaviour.

Old Penalty Regime financial penalty

6.15. The Authority considers that a financial penalty is an appropriate sanction in this

case, given the seriousness of the breach and the need to send out a strong

message of deterrence to others. Applying those factors here, and taking into

account the separate penalty being imposed under the New Penalty Regime, the

appropriate level of financial penalty to be imposed under the Old Penalty Regime

is £7,250,000 (reduced to £5,075,000 for early settlement at stage 1).

Financial Penalty under the New Penalty Regime

6.16. The Authority’s policy on the imposition of financial penalties relevant to the

misconduct from 6 March 2010 is set out in Chapter 6 of the version of DEPP that

was in force from 6 March 2010. All references to DEPP in this section are

references to that version of DEPP. Under the New Penalty Regime, 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

6.17. 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.

6.18. DEPP 6.5A.1G(2) states that where a firm agrees to carry out a redress

programme to compensate those who have suffered loss as a result of the breach

or where the Authority decides to impose a redress programme, the Authority will

take this into consideration. In such cases the final penalty might not include a

disgorgement element, or the disgorgement element might be reduced.

6.19. As HML’s past business reviews, which cover the relevant areas of misconduct,

have resulted in redress being paid and will result in further redress being paid

totalling approximately £16.8 million to affected customers, the Authority

considers that no disgorgement is required.

6.20. Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.21. 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.

6.22. The Authority considers that the revenue generated by HML is indicative of the

harm or potential harm caused by its breach. The Authority has therefore

determined a figure based on a percentage of HML’s relevant revenue. HML’s

relevant revenue is generated from its sale of all insurance policies to the retail

market and is set out in its audited accounts and regulatory returns to the

Authority. The period of HML’s breach for the purpose of calculating the financial

penalty under the New Penalty Regime is the period from 6 March 2010 to 27

October 2011. The Authority considers HML’s relevant revenue for this period to

be £365,320,584.

6.23. In deciding on the percentage of the relevant revenue 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%

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

factors which reflect the impact and nature of the breach, and whether it was

committed deliberately or recklessly. The Authority considers the following

factors to be relevant.

Impact of the breach

(1)
There were relatively small losses to many consumers so in aggregate a

large loss overall.

(2)
The level of benefit gained by HML from the misconduct either directly or

indirectly, includes the figure of £16.8 million which HML is forecasted to

pay to affected customers by way of redress.

(3)
The breaches have not had an adverse effect on markets.

(4)
A significant proportion of HML’s customers are aged 65 years or older, so

the misconduct potentially had an effect on more vulnerable people.

Nature of the breach

(5)
The breaches occurred over a sustained period (of which approximately 1

year and 7 months fell within the New Penalty Regime), potentially

affected between 2.3 to 3.3 million customers and involved many

individual breaches of regulatory rules and standards.

(6)
The breaches revealed systemic weaknesses in HML’s procedures,

management systems and internal controls relating to several fundamental

parts of the business, including management, sales and complaint

handling.

(7)
HML’s failings placed all of its customers at risk of being treated unfairly,

which presented a risk to the Authority’s objective of securing protection

for consumers, both of which risks crystallised and resulted in consumer

detriment.

(8)
No financial crime was facilitated, occasioned or otherwise attributable to

the breach and there was no scope for the facilitation of financial crime.

(9)
HML did not fail to conduct its business with integrity.

Whether the breach was deliberate and or reckless

(10)
The breaches were not intentional on the part of HML’s senior

management. There was also no attempt by HML to conceal the

misconduct.

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

the breach to be level 3 and so the Step 2 figure is 10% of £365,320,584.

6.26. Step 2 is therefore £36,532,058.40.

Step 3: mitigating and aggravating factors

6.27. 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.

6.28. The Authority considers that there are no relevant mitigating or aggravating

factors.

6.29. Step 3 is therefore £36,532,058.40.

Step 4: adjustment for deterrence

6.30. 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.

6.31. The Authority considers that the Step 3 figure of £36,532,058.40 represents a

sufficient deterrent to HML and others, and so has not increased the penalty at

Step 4.

6.32. Step 4 is therefore £36,532,058.40.

Step 5: settlement discount

6.33. 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.

6.34. The Authority and HML reached agreement at stage 1 and so a 30% discount

applies to the Step 4 figure.

6.35. Step 5 is therefore £25,572,440.88, which has been rounded down to

£25,572,400.

New Penalty Regime financial penalty

6.36. Having applied the five-step framework set out in DEPP, the appropriate level of

financial penalty under the New Penalty Regime is £25,572,400.

36

Total financial penalty

6.37. The Authority considers that combining the two separate penalties calculated

under the Old Penalty Regime and New Penalty Regime produces a figure which is

proportionate. The Authority therefore has decided to impose a total financial

penalty of £30,647,400 on HML for breaching Principles 3, 6 and 7.

7.
PROCEDURAL MATTERS

Decision maker

7.1. The decision which gave rise to the obligation to give this 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.

The following statutory rights are important.

Manner of and time for Payment

7.3.
The financial penalty must be paid in full by HML to the Authority by no later than

26 February 2014, 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 27 February 2014, the

Authority may recover the outstanding amount as a debt owed by HML 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 notice relates. Under those provisions,

the Authority must publish such information about the matter to which this 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 HML or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

7.6.
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

7.7.
For more information concerning this matter generally, contact Kate Tuckley

(direct line: 020 7066 7086 /email: kate.tuckley@fca.org.uk) of the Enforcement

and Financial Crime Division of the Authority.

Financial Conduct Authority, Enforcement and Financial Crime Division

38

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1.
RELEVANT STATUTORY PROVISIONS

1.1.
The Authority’s operational objectives, set out in section 1B(3) of the Act, 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 considers

appropriate."

2.
RELEVANT REGULATORY PROVISIONS

Principles for Businesses

2.1.
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 Principles are as follows.

2.2.
Principle 3 provides:

“A firm must take reasonable care to organise and control its affairs responsibly

and effectively, with adequate risk management systems.”

2.3.
Principle 6 provides:

“A firm must pay due regard to the interests of its customers and treat them

fairly.”

2.4.
Principle 7 provides:

“A firm must pay due regard to the information needs of its clients, and

communicate information to them in a way which is clear, fair and not

misleading.”

DISP

2.5.
Chapter 1 of DISP, which forms part of the Authority’s Handbook, sets out the

rules and guidance on how firms should deal promptly and fairly with customer

complaints. The relevant rule is as follows.

2.6.
DISP 1.4.1R provides:

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

(1)
investigate the complaint competently, diligently and impartially;

(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.”

DEPP

2.7.
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

2.8.
The Enforcement Guide sets out the Authority’s approach to exercising its main

enforcement powers under the Act.

2.9.
Chapter 7 of the Enforcement Guide sets out the Authority’s approach to

exercising its power to impose a financial penalty.

The Enforcement Manual

2.10. The Enforcement Manual, which was in force until 28 August 2007, set out the

Authority’s approach to exercising its enforcement powers prior to that date.