Insurers fined over £2m by regulator for altering customer complaints documents

Direct Line and Churchill "failed to act with due skill, care and diligence" when they amended files requested by the FSA which had failed an internal review, the regulator said.

It added that the majority of the changes were "minor" and did not result in any customer detriment. The fine was initially £3.1 million fine but was reduced by 30% after the insurers agreed to settle the case at an early stage. It is intended to reflect the "serious" nature of firms amending customer records, the FSA said.

In a short notice visit to the companies' offices in June 2010 the FSA found that 27 of the 50 closed complaint files it had requested earlier that year as part of an ongoing investigation into the two insurers' complaint handling abilities had been altered before they were sent to it. In addition, seven internal documents contained staff signatures forged by one member of staff.

The companies had asked a major accountancy firm to carry out a sample review in preparation for the regulator's request, the FSA said. 28% of the 110 files reviewed by the auditor failed this assessment, in many cases because "evidence which had been relied upon by the complaint handler when dealing with the complaint had not been included in the paper file," according to the FSA's report (13-page / 146KB PDF).

The regulator said that staff at the insurers had been informed of this failure rate during a conference call and had been told to "consider what they might do" to ensure that their files were complete and would pass the FSA inspection. Staff had been reminded that the most important thing was to get the "right outcome for customers", the FSA said.

Tracey McDermott, the FSA's acting director of enforcement and financial crime, said that the insurers' attempts to ensure that complete files were provided to the regulator had "backfired" in a "serious breach".

"The Firms failed to give clear instructions resulting in staff making inappropriate alternations with one individual even forging the signature of colleagues. The Firms' management did not know what changes had been made or when," she said in a statement.

"In this case, the alterations did not impact on the FSA's ability to do our job. The significant penalty is however intended to underscore to firms that it is of critical importance that material provided to the FSA must reflect the picture as it is - not as they might like it to be."

Both Direct Line and Churchill are now operated by UK Insurance Limited (UKI), which is owned by the Royal Bank of Scotland Group (RBS). RBS will therefore be responsible for paying the fine, the FSA said.

In a statement, RBS Insurance said that UKI had cooperated fully with the FSA throughout its investigation, including by undertaking a detailed internal investigation which the regulator was able to rely on.

"We very much regret the findings of the FSA investigation. Although no customers were disadvantaged, we are very disappointed that we did not meet the standards we expect of ourselves and which the FSA expects of us," said Paul Geddes, its chief executive.

He added that since becoming aware of the issue the company had taken action to ensure that it would avoid similar breaches in future.