Important Lessons to Learn From Carphone Warehouse’s FCA Fines

Syedur Rahman of business crime solicitors Rahman Ravelli explains what businesses can learn from the huge fine imposed on Carphone Warehouse for mis-selling insurance.

The fact that Carphone Warehouse has been hit with a £29M penalty for mis-selling of its insurance may, at first glance, seem to be nothing more than the ever-lively mobile phone market once again making headlines for the wrong reasons.

But a number of points can be taken from it. And businesses of all kinds would do well to heed them.

The first one is the importance of whistleblowing. The FCA made it clear that its investigation stemmed from whistleblowing and said that without this the problem at Carphone Warehouse may never have come to light. And yet Carphone Warehouse’s management were found to have failed to consider whistleblowing reports that had been made. This has to be seen as a clear example of the importance to companies of having proper whistleblowing reporting procedures – and of investigating and acting upon any such reports as they arise.

A second point is, to put it simply, the need to put right previous wrongs. The fact that Carphone Warehouse had been fined in 2006 over selling of insurance products was thought to be “particularly relevant’’ by the FCA. In its latest investigation, the FCA went as far as to say Carphone Warehouse’s 2006 problem was an aggravating factor: after that 2006 fine the company had said it would carry out a thorough review of its insurance sales, a review which the FCA says the company has “clearly failed properly to carry out”.

And the third – and arguably most significant – point is that this is the first finally decided case under the FCA’s new partial settlement process. This process makes it possible for companies to agree some parts of a case against it, challenge other aspects and yet still be eligible for some or all of the settlement discount.

This process makes it possible for companies to agree some parts of a case against it, challenge other aspects and yet still be eligible for some or all of the settlement discount.

Carphone Warehouse agreed the facts and accepted liability but challenged the proposed penalty at the Regulatory Decisions Committee (RDC). The outcome was it obtaining a 30% discount on the £41.6M fine. The mobile phone giant clearly made mistakes that prompted attention from the FCA but the eventual outcome indicates the scope for a reduced penalty if negotiations are handled correctly.

This arguably indicates the value of negotiation and cooperation with the authorities. Yet it would be a mistake for businesses to think that such a process will always enable them to bargain down the size of a fine. And it would be a bigger error if companies came to view such fines as simply a routine cost of doing business. Such an approach would be dangerous. The FCA made a point of Carphone Warehouse’s previous insurance problems in 2006 and its failure then to complete the review of that part of its business. It is unlikely to have a short memory if it keeps having to penalise a company for repeated and similar failings.

Companies would be fooling themselves if they thought they only have to pay lip service to the FCA. The partial settlement process does allow them some leeway on negotiating aspects of a case. But it is unlikely that a company’s inability – or unwillingness – to instigate changes to stop failings will see it receive lenient treatment. The FCA and any other agency investigating suspected malpractice is unlikely to view ongoing failings favourably.

Even companies that have the deepest pockets when it comes to paying fines have to understand the value of making significant changes to working practices in order to prevent further future penalties. If they do not the size of future penalties is only likely to increase.