Shareholders in the National Australia Bank (NAB) face the unhappy prospect their bank will have to fork out hundreds of millions dollars above what has already been set aside to meet the rising cost of misselling financial insurance products by its UK subsidiary, Clydesdale.
The NAB is trying to reduce its involvement in UK banking, but the Clydesdale operation has proven unsaleable, partly because of the cost of compensating customers for the misselling of financial products, and other problems uncovered by UK regulators.
The NAB has already set aside more than $1.5 billion to handle compensation for this misselling, but in a major embarrassment for the bank, Clydesdale has been accused of deliberately trying to reduce those payments by unfairly denying claims from thousands of customers who were sold dodgy insurance products.
The Financial Conduct Authority fined Clydesdale Bank 20.7 million pounds ($30.3 million) for failings in how it handled insurance mis-selling claims, representing the FCA’s biggest ever fine related to the payment protection insurance (PPI) scandal, which has so far cost UK banks well over 24 billion pounds, and it could rise to top 30 billion because of the rising pace of actual settlements.
UK banks sold PPI to millions of customers from 1990 to 2010 as an ad on to loans as a form of insurance. But it was flawed, there was no independent advice and the policies were highly lucrative for the banks.
All UK banks have been forced to compensate clients. In Clydesdale’s case, the Financial Conduct Authority said the fine was the largest of its type imposed on a bank, so serious were the problems.
Clydesdale set aside another £420 million for PPI compensation in October last year, taking the total amount it has set aside to £806 million (more than $A1.5 billion). Now it faces the prospect of that figure perhaps doubling because so many customers will have their compensation records checked and reassessed. Around 291 million pounds has so far been paid to customers.
Clydesdale also operates Yorkshire Bank, which is the NAB’s second UK bank. The news will not be welcomed at the NAB’s HQ in Melbourne as the bank has been gradually reducing its involvement in the UK by selling assets. Now it faces the prospect of tipping more money into the UK to meet the added cost of re-processing these claims and then compensating the customers involved.
NAB shares lost 0.4% to $39.43 on the ASX yesterday. The shares will come under pressure as shareholders question the latest bad news from the UK and the bank’s continuing involvement there.
NAB’s troubled UK operations cause more headaches
Clydesdale is the third bank to be fined for failings in its complaint handling procedures. Lloyds was fined £4.3 million in February 2013 and the Co-operative Bank was fined £113,000 in January 2013.
As many as 93,000 customers may be entitled to refunds or additional compensation, the FCA said in a statement issued overnight in London.
The Clydesdale apologised, and said it had now changed its procedures.
The Financial Conduct Authority said the serious failings at Clydesdale, owned by NAB occurred between May 2011 and July 2013.
It said Clydesdale provided false information to the Financial Ombudsman Service in response to requests for evidence of the records it held on PPI policies sold to customers
"We deeply regret any instance which led to the Financial Ombudsman Service receiving incorrect or incomplete information from us. These practices were not authorised or condoned by the bank,” Clydesdale’s acting chief executive Debbie Crosbie said in a statement issued in the UK.
The FCA said that as a result of Clydesdale’s conduct, of the 126,600 PPI complaints decided between May 2011 and July 2013, up to 42,200 may have been rejected unfairly and up to 50,900 upheld complaints may have resulted in inadequate redress for customers.
In its statement, the FCA explained that “in mid-2011 Clydesdale implemented inappropriate policies which meant that its PPI complaint handlers were not taking into account all relevant documents when deciding how to deal with complaints."
“In addition, between May 2012 and June 2013, Clydesdale provided false information to the Financial Ombudsman Service in response to requests for evidence of the records Clydesdale held on PPI policies sold to individual customers.
"A team within Clydesdale’s PPI complaint handling operation altered certain system print outs (in a small number of cases) to make it look as if Clydesdale held no relevant documents and 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 PPI leadership team or more senior management."
Georgina Philippou, acting director of enforcement and market oversight at the FCA said in the statement that “Clydesdale’s failings were unacceptable and fell well below the standard the FCA expects. The fact that Clydesdale misled the Financial Ombudsman by providing false information about the information it held is particularly serious and this is reflected in the size of the fine.
"We have been very clear about how firms should treat customers who may have been mis-sold PPI. In ignoring documents it held which were relevant to its customers’ complaints, Clydesdale failed to treat its customers fairly."
“Clydesdale’s inappropriate policies meant that, for PPI complaints about loans and mortgages which had been repaid more than seven years prior to the date of the complaint, its complaint handlers would not search for any documents on the basis that they 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 been destroyed and were still readily available. When calculating redress for credit card PPI complaints, handlers ignored those credit card statements that Clydesdale held for the period before the year 2000.
"The FCA also found that complaint handlers were failing to identify cases where the PPI policy sold was unsuitable for the customer, and found deficiencies in the training and monitoring of complaint handlers.
"Clydesdale will be reviewing all PPI complaints handled prior to August 2014 and offering redress to any customers impacted by these failings. Customers do not need to take any action – Clydesdale will be contacting all affected customers in due course,” the FCA’s statement said.
The FCA said that "Clydesdale agreed to settle at an early stage of the FCA’s investigation and therefore qualified for at 30% stage 1 discount. Were it not for this the FCA would have imposed a financial penalty of £29,540,500.”
It’s not the first time the NAB’s UK banks have been in trouble with the regulator. In 2013, they were fined £8.9 million for their treatment of customers affected by mortgage payment errors. The problems dated back to the period 2005-2010, during which a software error caused repayments on variable rate mortgages to be miscalculated – leaving thousands of borrowers underpaying their loans.
