Hastings lose Battle with FSA
You may have seen in the news the reports of Hasting Direct’s massive fine £735,000 fine over some mispriced policies they sold last year and subsequently cancelled with a minimum amount of notice. This has been well reported in the press, including the Guardian, the Independent and the BBC.
What has been less well reported is the shocking mis-selling, lying and sharp business practice foisted by Hastings upon their own customers – the FSA refers to “serious failings in the way in which Hastings dealt with customers after the cancellations”, and it was this failure to abide by the principles of Treating Customers Fairly in line with FSA rules, that led to the huge scale of the fine – the main news services have either missed or skimmed over these aspects, presumably because they didn’t delve too deeply into the FSA’s twenty page Final Notice judgement served on Hastings (106kb pdf file) Most of the info below comes directly from this official document.
I’ll admit that reading 20 pages of dry prose is not everyone’s idea of fun, but Hastings are probably counting their blessings right now that more of this has not been picked up by the mainstream media.
Before I continue I’ll remind you that opinions on this blog are my own, personal thoughts, and not those of the company, but I’ll also point out that all facts and quotes below are taken directly from the FSA document linked above.
The story starts back last summer, and you may remember several forums buzzing with the news that Hastings had started cancelling policies with only a few days warning and leaving people with just a few days to find alternative cover, or even less in many cases, when you consider that this was going on in the middle of the summer, when many people would have been on holiday. As an aside, many people on the forums were apparently unaware that Hastings is in fact an insurance broker, and not, as its trading name might imply, a direct writer.
The FSA investigation revealed that there were in fact two separate incidents where Hastings entered incorrect information onto their computer systems which led to them quoting prices that were very low – hundreds of pounds below the true rate which the underwriter, Highway, had intended to be available.
The first rating error, which the FSA refer to as “Highway One”, was loaded onto their system on the 15th June last year. Hastings’ own IT department spotted something a bit fishy – many more Highway policies going through than was normal – the same day, and asked the underwriting team to look into it. Hastings’ underwriters, for whatever reason, were happy that everything was fine and so a vital opportunity was missed to mitigate the situation at the outset.
10 days and nearly 2,000 underpriced policies later, the IT department brought another report to the attention of their management, and finally on the 26th of June a major error was discovered in the postcode rating data and immediately fixed.
At this stage the 1,880 policy holders had paid an average of £220 too little for their car insurance, and Hastings had a big problem. Luckily for them, the vast majority of the policies sold had not come into force, and so, they made up the difference on the few that were on cover, and hastily decided to try and cancel the remaining 1,850.
The FSA was critical of this decision, as whilst nearly all insurance companies have a clause allowing termination of cover with 7 days notice, most of them only use it if the customer has failed to tell the insurer some pertinent information, like a conviction or claim, lied about where they live or similar. The FSA managed to dig up evidence that Hastings had been told by the Financial Ombudsman Service that this was (in their opinion) an incorrect use of the clause.
And Hastings’ compliance department even sent an email to their customer services saying:
“I think the feeling from talking with others some of whom are ACII [Associates of the Chartered Insurance Institute] is that it is unfair cancellation of the contract, however, can appreciate the need to balance this up with commercial consideration due to the numbers involved”
But, despite clearly knowing that they were doing something dubious, they went ahead and did it anyway.
Because of the circumstances in which it usually happens, most insurance companies do not look too kindly on customers who have had an insurance contract cancelled, and may charge a higher premium, or even refuse to offer cover – so by doing this Hastings was well and truly shafting its customers.
But it got worse.
At this point Hastings must have decided to check through their systems for any other data entry errors, and sure enough on July 11th 2007, they found a biggie, which had been causing an unrelated misquoting error dating right back to January 2006 and meant that customers living in high-risk postcodes had been receiving quotes that were significantly underpriced. Another error, dating from the same rate input, was discovered in quotes for 19 year olds drivers was discovered on the 20th July – they had been on average paying £539 too little. The FSA refers to these errors as “Highway Two”.
The errors in these quotes affected nearly 4,000 policies, and at the time of discovery, 3,449 were still in force.
Hastings decided they could make up the difference on the policies that were nearly finished, with less than three months to run, but this still left them with 2,978 policies. Highway told Hastings that if it wanted the customers to remain on cover, they would have to find £1.37m to cover the difference. Hastings board decided to cancel all the policies on the 7th of August, using the same 7 day notice condition as before.
The big difference this time being that these were actual policies, some of which had been on cover for nearly nine months.
The FSA’s conclusion was that Hastings should have tried harder to think of a different solution.
“Prior to making the formal decision to cancel, in the FSA’s view, Hastings did not fully and properly consider the possible alternatives, and did not adequately take into account the implications and consequences of its decision. In particular, it did not consider other possible ways of continuing the policies to the full term such as alternative sources of funding for the premium shortfall or re-broking the policies within the IAG UK group. (Blogger’s note: IAG also owns underwriters Advantage and Equity Red Star)”
The FSA was also unhappy that they were not made aware of the situation until five weeks after the initial errors were identified and one week after Hastings had made the decision to cancel policies and started doing it. This meant that it was too late for the FSA to offer any input into the decision making process.
Although Hastings paid out pro rata refunds to the affected customers:
“All affected policy holders had to fund new insurance before receiving the refund for their cancelled insurance policy.”
And in regard to compensation:
“Hastings placed too much weight on the fact that customers had enjoyed a period of cheaper motor insurance of up to a year, did not consider paying compensation to all affected customers for the effort of re-arranging their policies early and awarded redress only where customers complained and cited stress and inconvenience.”
For those who had lost out on an extra year’s no claims discount after many months of claim free driving:
“Hastings compensated customers for the difference in premiums which they were forced to pay as a consequence of losing their NCD, although this was done only where customers actively took steps to complain to Hastings and request compensation for their loss of NCD entitlement. Hastings did not carry out any later exercise to identify those customers who would have been entitled to a full year’s NCD had their insurance not been cancelled mid-term.”
For a 19 year old, a year’s worth of no-claims could be worth many hundreds of pounds. The situation was not helped by Hastings customer services team giving out misleading and inaccurate advice on many occasions identified by the FSA, with untrue statements such as “most insurance companies would accept proof of NCD in months,” and “there is no point in speaking to the FSA/FOS as they told us to do [the cancellation].”
And although Hastings produced a letter explaining to future insurers that the cancellation was not the customer’s fault, these were only sent out when a customer specifically asked for one.
The FSA also noted over 100 cases of mis-selling when customers called up to re-broke their policy.
This catalogue of errors led to the massive fine, particularly in respect of the second “Highway Two” error, as the FSA considered:
“Hastings, having already been confronted with the issue in relation to Highway One, should have been in a better position to appreciate whether it was appropriate to invoke the seven day cancellation clause… Hastings simply focussed on the cost … and failed to properly consider its TCF [Treating Customers Fairly] obligations with the result that most Highway Two policies were cancelled mid-term.”
By choosing to cancel, Hastings may have caused considerable problems for their erstwhile customers, which may leave them with higher premiums for years to come. Aside from the loss of no claims discount accrual, the more serious problem is the mere fact of the cancellation itself. Notwithstanding the letter mentioned above (and that Hastings have now been told to send to all affected customers) many companies will not consider the circumstances of a cancellation before deciding that they won’t quote the list, and online quotes are going to be out of the question in most cases, I would imagine.
Although a specialist broker, (like us) would be able to consider the individual circumstances and could arrange competitive cover, that still seems to me to place an undue difficulty on the customer and a restriction on obtaining insurance from certain providers or over certain channels.
Well lets hope that everyone in the insurance community learns some lessons from this. But there is one more damning indictment of Hastings still to come.
According to the FSA:
“In relation to Highway Two, Hastings arranged for a limited number of customers to remain on cover on the basis that they were the most likely to escalate their complaints and cause Hastings the ‘most problems.’”
Or in other words, Hastings had a two tier system in operation, and if you were prepared to make a fuss, they would give you better treatment. It seems the moral here is that if you ever find yourself in this situation, or on the receiving end of some poor service from Hastings, make sure they know you are prepared to cause them problems if necessary.
The worst aspect of this sorry saga is that the people who were most disadvantaged were the customers that just accepted what was going on with resignation.
I’m sure the fine has given Hastings something to think about, but I wonder, given their evident concern for their bottom line, whether the fine was enough. Shouldn’t it have at least covered the £1.37 million shortfall that Hastings refused to make up?