Clifford Chance

On 13 March 2019 the FCA fined Carphone Warehouse £29,107,600 for mis-selling mobile phone insurance products called "Geek Squad" in the period 2008-2015. There are important points arising from the case regarding systems and controls, whistleblowing and the FCA's partial settlement and penalty policies.

Key points on systems and controls, MI and whistleblowing:

• Focusing on why, rather than whether, a customer needs a product gave rise to mis-selling – Sales were made on an advised basis. Staff were not trained to assess whether customers needed the product, rather they were trained to identify why the customer needed the product and to overcome objections. Sales staff were informed that responding to objections was "not about selling a product to a customer who does not want or need the cover; it is about tailoring your explanation of the product benefits to address the objection and to make sure the customer takes out a product they want".
• Carphone Warehouse's senior management committee had inadequate MI to oversee the sales:
  • MI did not contain sufficient qualitative information regarding reasons for customer complaints and cancellations.
  • Customer survey questions were not sufficiently broad to pick up that sales staff were failing properly to assess customer needs.
  • The committee failed to consider whistleblowing reports for most of the relevant period and when it did so, MI did not contain sufficient qualitative data about the reasons for whistleblowing events.

• Emphasis placed on the significance of whistleblowing – In announcing the penalty, the FCA placed great emphasis on the fact that this investigation stemmed from whistleblowing reports. Mark Steward made the following comment:
  
  "Without whistleblowers coming forward these practices may never have come to light. In the past few years, whistleblowers have contributed critical intelligence to the enforcement actions we have taken against firms and individuals."

Key points on the FCA's penalty process:

• RDC confirms broad scope of "relevant revenue" in penalty calculation – In accordance with the FCA's penalty calculation formula, the FCA's fine is based on "relevant revenue" which is the revenue derived by the firm during the period of the breach from the products or business areas to which the breach relates. Carphone Warehouse argued that this figure should be confined to the sales commission it earned. The RDC disagreed, extending relevant revenue to include post-sales payments and profit commission.
• Discount given for redress scheme – but more credit would have been given for a broader redress scheme – Carphone Warehouse conducted two redress processes. The first relating to policy cancellations and the second relating to customer complaints. The schemes were limited in scope in certain respects. For example, the first scheme excluded passive cancellations. The FCA made no criticism of this but indicated that had the redress schemes both been broader in scope the FCA "would have given more weight to the redress exercises as mitigating factors".
• Historical disciplinary action retains weight as an aggravating factor – Carphone Warehouse had been fined in 2006 in relation to sales of insurance products during 2005. Although the events in question occurred almost 15 years ago and did not relate to the same specific issues, the FCA considered the previous disciplinary sanction "particularly relevant" and an aggravating factor because the firm had committed to a comprehensive review of its insurance sales channels in 2006 which it had "clearly failed properly to carry out".
• First Final Notice under partial settlement procedure – This is the first finally decided case under the FCA's new partial settlement process, which allows firms to agree some parts of a case whilst challenging others and preserving some or all of the settlement discount. In this case the firm agreed all facts and liability but challenged Enforcement's proposed penalty at the RDC and received a full 30% settlement discount as a result. The FCA's previously announced Decision Notice against Linear Investments under the same partial settlement procedure is subject to challenge in the Upper Tribunal.