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Carphone Warehouse FCA fine

20th March 2019

Carphone Warehouse FCA fine

My husband is not that keen on shopping, but he finds the experience especially challenging when we go out to buy something where there is the risk of someone trying to sell us add-on insurance cover.

Add-on insurance is a policy purchased as a secondary part of a main transaction. It commonly happens when you buy an electrical product or gadget and the shop assist asks you whether you are worried about the item breaking down or being stolen. Suddenly you are fearful that this shiny new possession that you saved your money to buy, will be lost or damaged.

This is the part of the transaction my husband hates. He holds his breath waiting for my reply, hoping I will smile sweetly and robustly say no and also that the shop assistant will then let it rest. That doesn’t usually happen. Sometimes I ask them to talk me through the options but if I just say no, the shop assistant will usually then try to explain why I need the cover – my husband will shake his head and usually go for a walk round the shop while the conversation between me and the shop assistant continues to its inevitable end.

I remember many years ago buying a mobile phone at Carphone Warehouse where the assistant was adamant the cover he was trying to sell me was better than my home contents cover because it included worldwide cover and “new for old”, he was insistent my home contents policy would not provide such cover. That was not the case - I did (and still do) have adequate cover for my mobile phone under my home contents insurance – there was no need for me to pay the extra premium for the Carphone Warehouse policy.

So it’s come as no great shock to me, that the Financial Conduct Authority (FCA) has fined Carphone Warehouse over £29m for insurance mis-selling before 2016. In addition, Carphone Warehouse must compensate all affected customers.

This relates to sales of a product called Geek Squad, a technical support plan and insurance policy proving cover for repair or replacement of mobile phones in the event of breakdown, accidental damage, loss or theft.

The Carphone Warehouse sales approach

According to the FCA report staff were encouraged to overcome customer objections to buying cover.

In some early training material, staff were told “Customers only buy something if they see a need for it. Our job is to show them the need”. Staff were also told that selling is “really all about matching needs to benefits in such a way that it makes it very difficult to refuse.” If the customer already had cover, staff were encouraged to emphasise the likelihood that Geek Squad offered more comprehensive cover.

If the customer said they may already have cover,  the suggested response was “If you take it today you have 14 days to cancel if you change your mind for any reason. That way, you’re definitely covered from the minute you sign the policy certificate. There is no long term commitment to keeping Geek Squad. You can always take it to start with, and cancel it later in the contract if you feel it no longer of benefit to you. I do recommend you take it to start with just to be sure you’re covered”.

This approach meant that many customers bought cover they did not need.

It is hard to understand why in setting up this product, more care was not taken to check, test and monitor the sales process. Certainly, when setting up conduct risk due diligence frameworks for my clients I would expect a product like this to be high conduct risk requiring careful and close checking of and monitoring of the sales process.

Identifying the issue

In additional to monitoring and sample checking, there were other indicators that should have led to identification of this issue:

  • Many policies were cancelled early, for example in January 2014, 35% of policies were cancelled within the first 3 months of being taken out. 
  • Complaints about this issue were not properly investigated. Complaints staff made decisions based on the signed certificate of insurance (the document signed by customers when the sale was agreed), but customer testimony was not taken into account.

The high cancellation rate and complaint numbers should have highlighted there was an issue. 

Bonus

Good bonus schemes should always have a claw back option and so it is disappointing to see (from the FCA report) that there was an entry on the Carphone Warehouse Whistleblowing log stating “when selling geeks [sic] squad insurance he does not always go over the policy fully and always uses 14 days to cancel as a way to sell it, which probably mean [sic] 90% of the policies are being cancelled yet he is still getting bonus

This indicates staff bonuses were paid if customers cancelled within the first 14 days, a practice that would not discourage mis-selling.

What can we learn?

Taking aside the obvious training and process flaws which appear to show little regard for the customer, I see this as a timely reminder of the following in writing and selling add-on insurance policies of this type:

  • ·The need for robust challenge and review from the shoes of the customer.
  • ·Selling a product where it is likely the customer already has cover elsewhere requires robust due diligence and monitoring.
  • ·A complaint team that is prepared to dig down into the trigger of each complaint and a strong/empowered complaint manager.
  • ·Robust monitoring of cancellations.
  • ·A bonus scheme that does not encourage mis-selling.

I am also left wondering what the impact has been on the insurer who provided this cover and no doubt will have undertaken its own due diligence and monitoring of the Carphone Warehouse sales process.

Author: Sally Pearce (Conduct Matters Ltd)


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