Group Regulatory Risk Group Regulatory Risk A New Force in Regulatory Risk Management 1 Group Regulatory Risk Group Regulatory Risk A New Force in Regulatory

Group Regulatory RiskGroup Regulatory RiskA New Force in Regulatory Risk Management

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Review by Group Regulatory Risk - December 2003

Draft summary report for discussion and agreement

Mortgage endowment complaints handling


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Contents Introduction and context

Terms of reference for the review

The review team

What we did

What we found in summary

Processes

People

Case review

Management systems and controls

Key conclusions

Key recommendations

Appendices containing further detail


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HBOS Retail Division asked Group Regulatory Risk (“GRR”) in mid

November 2003 to carry out a review of its MEC handling.

Following this request, the Board of Directors received a letter

containing the risk assessment by the FSA of the Retail Division. The

letter was dated 1 December 2003 and in its Risk Mitigation Programme

on page 8, the FSA stated its formal intention to review “the adequacy

of the processes and standards in place for reviewing MECs…”. In

addition, the FSA stated that it would commence its thematic work

relating to Treating Customers Fairly with the same review.

Therefore, the review has been carried out to cover both the original

requirements of the Retail Division as well as in preparation for and to

assist the FSA in its review which is due to commence on 5th January.

It has been agreed to provide the FSA with a copy of this document in

advance of their visit.

Introduction and context for the review


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Our terms of reference for the review required an assessment of the following

areas:-

The design and documentation of all the processes relating to the handling of MECs

including the standards applied to decision making.

The “people” issues associated with handling MECs. This covered:-

Recruitment and selection

Training and competence from day one through to competence and its ongoing

maintenance for case handlers and those carrying out supervisory / management

roles and responsibilities.

A detailed substantive review of an agreed sample of actual cases which covered all the

key categories of complaints. The design of the sample was agreed with GIA as being

appropriate. GIA’s opinion on the GRR work conducted can be found in Appendix 3.

All aspects of the management systems and controls that were applied to the handling

of MEC to ensure that it achieved the required results and compliance with FOS, FSA

and HBOS internal requirements.

Terms of reference


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The review team was selected for its in depth knowledge and

understanding of the mortgage endowment review, the regulatory

requirements which apply to it as well experience in conducting reviews

of this nature.

Key personnel in the team were:-

Paul Moore, the new Head of GRR lead the review.

Susannah Hammond, the GRR Divisional Liaison Officer for Retail since the

merger managed the work on a day to day basis and was supported by Mike

Gardener and James Davies from IID Risk (now in GRR). She lead an internal

team of four, 2 from GRR and 2 seconded from RRR.

David Homewood from GIA was fully involved from the start of the review.

Three highly experienced E&Y staff lead by a senior manager were seconded

to the team as well as a senior manager from KPMG. These individuals have

been involved in other major MEC work across the industry and were able to

provide the internal team with advice as to the benchmark across the

industry.

The team who carried out the review


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We carried out our evidence gathering in the standard way by:-

Reviewing all key procedural and other documentation relevant to our terms of

reference – a list of the key documents reviewed is attached as Appendix 1.

Reviewing the full complaint handling files in the agreed sample. We reviewed

a total of 224 cases. GIA approved the sample selection and methodology.

Holding meetings with key management personnel and a small number of case

handlers.

We analysed and challenged the evidence we gathered in numerous

detailed meetings both with the entire review team as well with

management.

The Head of GRR, in particular, carried out a detailed challenge process

during the review including discussions with the Head of Retail Risk, the

Head of Retail Regulatory Risk and Andy Hornby, the CEO of the Retail

Division.

Therefore, the findings, conclusions and recommendations set out in this

document represent the consensus view of the HBOS Group.

What we did


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Important preliminary points

At all times the review team was given unfettered access to all personnel

and documentation required to carry out its work and management has

cooperated fully and proactively in the review.

In order to provide the FSA with the report in advance of its visit in January, it

should be noted that the review team carried out the work in a short period

of time between 24th November, 2003 and 18th December, 2003. In these

circumstances, it is not surprising that the team identified further work which

it would like to carry out to corroborate its initial findings. Details of

recommendations leading to further work are set out in Appendix 4.

GRR are, of course, happy to work along side the FSA when they make their

visit if that would be helpful.

What we found in summary


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Our key findings in relation to the processes and standards in place for

reviewing MEC’s are as follows:-

In relation to Halifax MECs which represent the vast majority of complaints

(about 95%), we are of the opinion that the procedures and standards are, in

all material respects, fit for purpose and are in line with, and have altered

with, the prevailing guidance from FOS, FSA and HBOS internal standards

across all categories of complaint.

This means that we believe that they are designed, documented and

understood in such a way that they would ensure, in all material respects,

complaints have been and are investigated and determined in accordance

with our understanding of the requisite prevailing standards.

However, management accept that the procedures could be enhanced by

adding further detail in relation to the standards to be applied by case

handlers and supervisors in arriving at individual decisions.

What we found – case handling processes


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In relation to Birmingham Midshires (“BM”) MECs which only represent 4% of

HBOS’s MEC the procedures are mostly appropriate but we are of the opinion

that as BM were unaware of the “Tiner Letter” their complaint handling

processes do not cover all the Tiner requirements and are, therefore, not

wholly fit for purpose. However, now that the issue of BM’s non-receipt of the

“Tiner Letter” has come to light a wholesale retrospective review of all cases

effected has been agreed with management and all BM complaint handling

procedures will be appropriately updated.

In relation to BOS MECs which only represent 1% of HBOS’s MEC the

procedures appear to be fit for purpose though specific case sampling has

not been carried out. Consideration will be given to sampling the BOS

category of MECs in the New Year.

What we found – case handling processes


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In our view, the quality of the people recruited to investigate and

determine MECs is the fundamental control in a project of this kind.

The recruitment process is adequate and 350 additional customer

relations staff were recruited in 2003.

What is clear from our review and what is accepted by management

and staff is that the T&C scheme, although fit for purpose, has not

always been recorded as having been carried out. However we believe

that this has not had an impact due to the use of 100% file checking for

all new starters until deemed competent.

What we found - people


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The span of control between complaint file reviewers and team leaders

averages 11 and has a maximum of 16. Management are aware of the

issues surrounding the current higher management span of control (i.e.

between team leaders and the next level up of management) which is

currently nineteen to one. Whilst initial priority had been given to

recruitment of file reviewers to ensure that both the terms of the waiver

could be met and the increasing MEC volumes handled, senior

management have active plans in place for the recruitment of

additional appropriate management.

From conversations with management, the unprecedented speed of

expansion of the MEC team has been undertaken with a clear sight on

underpinning safeguards to the customer at all times. It would be true

to say, however, that such an explosion of activity has naturally

stretched and tested the wider Customer Relations department to its

limits on occasions.



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Notwithstanding the weaknesses in relation to the T&C scheme, there are some important mitigating factors:-

Only those staff who have had sufficient cases 100% checked (and passed) to be confident of their competence do not have 100% of their cases checked. CRT advised that in November 62% of all cases checked by first line handlers were 100% checked by their supervisors. Whilst the review team has not fully corroborated the substantive quality of the supervisory checking (and associated MI) the strong quality of the decision making found in the case files reviewed provides key supporting evidence.

We have evidence from the MI system being used that the 100% checks have been carried out and the supervisory oversight is graded into Pass, Pass with Development and Fail. From sight of MI spreadsheets maintained by team leaders, one hub since 1st September on post-FSA cases had 283 supervisory checks, 97 were classified as Pass, 178 Pass with Development and 8 Failed.

Additional evidence of supervisory checks themselves was found on the complaint files sampled. However, there is no initial evidence of trend or thematic analysis carried out as a result of the supervisory checks.



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In relation to the 6 of Post A day cases where the review team disagreed with the case handler and the customer relations department, it is important to note that 3 of the cases were such that the judgements involved were “fine”, that is to say difficult to call one way or the other. Consequently, the fact that the review team disagreed in the final analysis is not sufficient evidence of any systemic issues.

What we found - Case Review

Case Type/Result Total Halifax

Population

Halifax Cases

Sampled(% of total population)

GRR agree with original

CRT assessment

GRR Overturn

original CRT assessment

Post FSA Decline 832 45 (5.4%) 39 (86.7%) 6 (13.3%)

Pre FSA Decline 9,500 144 (1.5%) 141 (97.9%) 3 (2.1%)

Pre FSA Decline Retrospective

Review Overturn

Unknown(manualsample)

4 4 (100%) 0

Uphold 843 8 (1%) 8 (100%) 0

Withdrawn 124 2 (1.6%) 2 (100%) 0

Not Halifax Advice

1,940 6 (0.3%) 6 (100%) 0

Total 13,239 209 (1.6%) 200 (95.7%) 9 (4.3%)


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What we found - Case Review

Whilst the decision making process includes the assessment of suitability, duty of care, balance of probabilities and taking the wider picture into consideration, the criteria on which individual decisions were made were not always apparent or fully documented on each complaint file.

It is not unlikely that FSA would have come to similar conclusions on the above and may have found the occasional lack of full audit trail containing all reasoning and evidence considered for decisions taken of initial concern. However we remain of the opinion that the decisions taken are robust.

Birmingham Midshires Cases 15 BM cases were reviewed. As has been noted earlier the procedures were found not to be

clearly fit for purpose in all respects therefore a wholesale retrospective review of those cases effected will be undertaken.

BM uphold rates have been steady between 40% - 50% which demonstrates that the BM case handlers have, despite lack of knowledge of the “Tiner Letter”, been similar to Halifax in a customer focussed approach to decision making.

BM management estimate that the total number of complaints which were initially declined but potentially could have been upheld on Tiner grounds is between 200 and 250.


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When we reviewed management systems and controls, we concentrated

on finding evidence to answer the following key questions:-

Were all accountabilities clear?

Did those with accountability consider the whole question of systems and

controls holistically?

What were the key control mechanisms (internal and, where appropriate,

independent) to ensure that the procedures and standards were designed

properly, signed off as such and kept up to date?

What were the key control mechanisms (internal and, where appropriate,

independent) in place to ensure the case handlers followed the procedures,

investigated complaints fully and applied the standards in a way that was

likely to make the appropriate decision?

Was the management information adequate to enable the management team

to identify, review, manage and follow up key issues?

What we found – systems and controls


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Key findings were:-

Given the high-level of importance attached to this issue a SG was formed of very senior people from

the business. Even though the SG’s terms of reference made clear that it was a policy formation body

and was therefore not accountable for MEC governance it is clear that the SG did in a very detailed

way consider the line & policy which should be taken in relation to MECs, in particular:

SG met monthly and Andy Hornby attended every one;

Each SG considered a detailed analysis of MI including numbers of complaints, uphold rates by

category, comparisons of uphold rate with FOS, ageing of complaints;

Helen Roberts (Head of Customer Relations) was responsible for reporting details on resourcing,

T&C status and backlogs, recruitment and budgetary issues. Andy Hornby was on occasion asked

to both approve extra budget and also to exercise his influence to encourage appropriate

secondments;

Philip Hanson (Head of Mortgages and Secured Lending) and Arthur Selman (formerly Head of

Group Regulatory Risk) were responsible for the rationale for the waiver, policy changes and

advising on new FOS rulings and the resulting impact on the procedures and standards;

SG reviewed individual complaint cases to ensure that they were comfortable with the decisions

being taken, and

Andy Hornby kept James Crosby and Mike Ellis informed both of progress and any material issues

arising.



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Key findings were:-

Direct accountability of the MEC team was through the usual management

line in Customer Relations. The management line has recently changed so

that Helen Roberts now reports directly to David Walkden.

The control mechanisms in place to ensure the appropriate design, sign off

and continuous review of procedures and standards were part of an

expanded business as usual for Customer Relations though for MEC

procedures and processes these were also agreed with the FOS and sent to

the SG. There was a constant effort to make the right decision as to how

different types of complaint should be handled. This included updating

procedures in discussion with the SG to ensure that they remained in line

with both Tiner and changing FOS requirements.

The key internal control mechanism to ensure complaints were investigated

and determined appropriately was the implementation of 100% supervisory

review of all cases handled by an individual until they had met the T&C

requirements to become a competent reviewer.



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Key findings were:-

Retail Regulatory Risk (“RRR”) carried out independent monitoring of the

project and Arthur Selman, the previous head of GRR sat on the Steering

Group. In the opinion of the review team, the work carried out by RRR was of

high quality and was part of a suite of work assessing the adequacy of

complaints handling across the Retail Division. The findings of the RRR

monitoring work were reported to both SG and Retail Risk Committee, are

consistent with those of this GRR review and RRR action points identified

have already been taken forward.

BM MECs were not part of the business as usual accountability for Customer

Relations but reported functionally through their own management line.

However, going forward BM will be represented on the SG to ensure

consistency of approach.



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The waiver conditions imposed by FSA have been complied with in terms of

the length of the waiver (6 months to 17th December, 2003) and in terms of

resourcing levels where a compliment of 330 was reached and maintained.

The correspondence with complainants during the waiver period was in line

with the revised requirements for holdings letters and referral rights to the

FOS given at 20 weeks.

What we found – Waiver


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On the basis of the sample of Halifax cases reviewed by the team, a compliance rate of 95.7% in our opinion demonstrates that complaints are and were being investigated and determined in line with our understanding of the prevailing FOS, FSA and HBOS internal standards. Further in our opinion there was no evidence of any systemic issues arising.

However, there are certain weaknesses of which management are aware, which need to be remedied. These generally relate to record keeping and management systems & controls but have not, in our view, had any material impact on the actual case handling. The key recommendations follow and Appendix 4 has the detailed recommendations.

As previously noted, BM will conduct a full review in line with Tiner and all other relevant guidance to reconsider c200-250 cases which may have been defended inappropriately.

In our opinion, management have at all times and in all material respects complied with the requirements of the FOS, FSA and HBOS internal standards and we found no evidence of any negative cultural issues.

Key conclusions


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The key recommendations of the review can be summarised into five

areas where developments are required:

Management systems & controls

Record keeping

Enhancements to procedures

The production and use of MI

The handling of BM complaints.

Further details are supplied in Appendix 4.

Key recommendations


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Appendix 1 – List of documents reviewed

Appendix 2 – List of people interviewed

Appendix 3 - Group Internal Audit work and opinion

Appendix 4 - Detailed recommendations

Appendices


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o Structure charts

o Copies of CVs for key staff

o A breakdown of the resourcing of the team detailing the staffing numbers in place each month during 2003

o Copies of all training materials

o Details of the ongoing training and competency scheme

o A full responsibility map, detailing all businesses covered by each unit

o Original Jupiter Project Plan, including an assessment of the scale of the potential issue

o Amendments to the Project Plan

o Minutes of all Steering Group meetings including any papers circulated for the meeting

o Copies of all written procedures and confirmation of amendment dates

o Copies of all regulatory and FOS guidance detailing the process for inclusion within ongoing case handling procedures

o The rationale for the application for the FSA waiver

o Copies of information supplied to the FSA (not already included)

o The Tiner letter and subsequent correspondence



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o Copies of management information produced, including owner, circulation list, production

times

o Details of all complaints received by month, complaints resolved, upheld, declined and costs

of cases settled

o Minutes of team meetings

o Numbers of all cases dealt with by FOS including final cases assessment

o Details of any outsourcing relationships

o Details of relationships with tied reviews

o Details of how external influences are factored into planning, for example FSA initiatives,

the issue of re-projection letters from key insurers, etc



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Appendix 2 – People Interviewed

Andy Hornby

David Walkden

Philip Hanson

Dan Watkins

Arthur Selman

Helen Roberts

Andy Giles

Richard Graves

Dave Cockerill

Mark Nixon

Jenny Cartwright (T&C only)

Paul Dean (T&C only)

Alison Clegg (T&C only)

Andy Luce

Berni Downes

Sue Meredith

Stephen Millington


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Appendix 3 – GIA work and opinion

GIA assessment.

Based on our work and joint discussions with GRR, RRR and CR we are

satisfied that the opinion/findings stated by GRR in their report are valid

and accurate.

GIA have reviewed the process followed by GRR in this review and in

our opinion the process followed to review Customer Relations handling

of Mortgage Endowment complaints is robust. The review included the

following:-

Sample selection and methodology

Walkthrough of sample of review cases

Records and evidence held by GRR


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Appendix 4

Detailed Recommendations (all of which will be discussed and agreed in

further detail with management and RRR):

Management systems and controls:

Complete the recruitment for the new team structure to address spans of control issues

Quality testing of key internal standards to continue to be undertaken on an ongoing

basis by a combination of internal and independent monitoring

Consider updating the SG terms of reference and minutes arising to reflect its active

role in control, oversight and input into MEC handling

Record Keeping:

Ensure documentary evidence is retained to support adherence to all internal

procedures

Records to be kept of all internal and external meetings to form audit trail of changes to

and cascade of procedures

Full documentary, stand alone audit trail to be enhanced on each complaint file

containing all reasoning and evidence considered for decisions taken


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Appendix 4 - cont

Enhancements to Procedures:

Procedures to be enhanced to include further detail, examples, case studies and known internal factors to aid case handlers reference documentation and consistency of understanding

Procedures to be benchmarked against those to be considered “best in class”

Production and Use of Management Information:

Quality checking of CHAMP source data

Quality data indicators, including T&C data to be developed to allow enhanced reporting to SG, Risk and other Committees

Development of centralised T&C MI to support CRT in managing the remote hubs

Handling of BM complaints:

Holistic review of all post FSA declined mortgage endowment complaints

Closer working relationship to be developed with Halifax CRT

Revise BM complaint handling procedures in line with those developed in Halifax and consider wider impact on all complaints handled within BM

BM representation on the SG

Documents

Group Regulatory Risk Group Regulatory Risk A New Force in Regulatory Risk Management 1 Group Regulatory Risk Group Regulatory Risk A New Force in Regulatory