I am regularly asked by loyal readers about what can be done about endowment policies that are going miss their target (ie shortfall). This is therefore a good time to remind everyone as to what the Financial Services Authority (FSA) recommends.
Here is the relevant page from their website reproduced in full. Remember this is their advice (not mine):
This page contains frequently asked questions about mortgage endowments. These FAQs are correct as at date of publication. They are not individual guidance and only summarise information from our rules. Choose the topic area for the relevant questions and answers
Here is the relevant page from their website reproduced in full. Remember this is their advice (not mine):
This page contains frequently asked questions about mortgage endowments. These FAQs are correct as at date of publication. They are not individual guidance and only summarise information from our rules. Choose the topic area for the relevant questions and answers
- Claims Management Companies
- Compensation
- Complaints
- Financial Ombudsman Service and the Financial Service Compensation Scheme
- FSA's actions
- Projections between 1988 and 1994 including the 'LAUTRO charges' issue
- Projection rates
- Scottish solicitors
- Time-barring
Claims Management Companies
Are claims management companies regulated by the FSA? One company quotes 'Regulated by the Law Society and registered with the FSA' on its letterheads.
We do not regulate claims
management companies (CMCs) in respect of claims management activities.
However, some claims management companies are regulated by us for other
activities. These are often in the field of general insurance; for
instance, some sell 'after the event' insurance.
We can exercise powers over CMCs in relation to certain aspects of their claims management business, even if it is not a regulated activity. We and others, including the Office of Fair Trading (OFT), can take injunctive action under Part 8 of the Enterprise Act 2002 in respect of misleading advertising. However, to date, we have agreed that the Advertising Standards Agency (ASA) should take action in the first instance.
We also have an interest where CMC activities may have an impact on a regulated firm, or consumer interests in relation to regulated activities. Our rules in DISP provide that a complaint may be brought by a third party on a consumer's behalf, and firms must have in place and operate appropriate and effective procedures for handling expressions of dissatisfaction from, or on behalf of a consumer about a firm's provision of, or failure to provide a financial service.
From April 2007 CMCs operating in England and Wales must be authorised by the Ministry of Justice.
Related information:
Ministry of Justice
DISP Handbook
We can exercise powers over CMCs in relation to certain aspects of their claims management business, even if it is not a regulated activity. We and others, including the Office of Fair Trading (OFT), can take injunctive action under Part 8 of the Enterprise Act 2002 in respect of misleading advertising. However, to date, we have agreed that the Advertising Standards Agency (ASA) should take action in the first instance.
We also have an interest where CMC activities may have an impact on a regulated firm, or consumer interests in relation to regulated activities. Our rules in DISP provide that a complaint may be brought by a third party on a consumer's behalf, and firms must have in place and operate appropriate and effective procedures for handling expressions of dissatisfaction from, or on behalf of a consumer about a firm's provision of, or failure to provide a financial service.
From April 2007 CMCs operating in England and Wales must be authorised by the Ministry of Justice.
Related information:
Ministry of Justice
DISP Handbook
What is the FSA's position on Claims Management Companies?
Some consumers may choose to use
the service of a third party such as a claims management company (CMC).
We believe it is important that the consumer makes an informed choice in
these circumstances – i.e. understands that there are likely to be
costs involved in using a third party, and what those costs are. CMCs
generally charge a percentage of any compensation awarded; some also
charge an upfront fee.
In our consumer information we emphasise that consumers can access free complaints procedures through the firm, and then the Financial Ombudsman Service (FOS) if necessary. We require firms to have robust complaint handling procedures and firms are expected to treat their customers fairly.
In our consumer information we emphasise that consumers can access free complaints procedures through the firm, and then the Financial Ombudsman Service (FOS) if necessary. We require firms to have robust complaint handling procedures and firms are expected to treat their customers fairly.
Compensation
Can you explain how compensation is calculated?
We have issued guidance to firms
on how they should handle endowment complaints and calculate redress
where appropriate. This sets out a standard approach, but does not
remove the firm's obligation to consider calculating redress in the most
appropriate manner given the facts and circumstances of the case.
Compensation is intended to put a consumer in the position they would otherwise have been in, had the inappropriate advice not been given. Generally speaking this is likely to mean that the consumer would have taken out a repayment mortgage, possibly with associated life cover. No compensation is due if the consumer is not worse off.
The calculation involves comparing the mortgage interest and endowment premiums actually paid, and the surrender value of the policy, with what would have been paid out under an equivalent repayment mortgage, and how much capital would have been repaid. A range of other factors may also need to be considered, such as the need for life assurance or whether the policy runs into retirement. Firms may also, in some circumstances, take into account 'savings' in assessing the amount of redress paid. This occurs where the monthly cost of an endowment mortgage was cheaper than the equivalent repayment mortgage. Firms that take account of savings have to explain this to consumers in writing.
If a consumer does not understand a compensation calculation, or they think there is an error in the calculation, they should contact the firm to ask for a breakdown of the figures. If they are still unhappy with the firm's response they can refer their complaint to the FOS.
The FOS has published information on its website about calculating redress in more complicated cases.
We are unable to investigate or review individual complaints. However, we do produce a consumer factsheet on mortgage endowment complaints, which includes more information on compensation.
Related information:
Complaints factsheet
FOS
Compensation is intended to put a consumer in the position they would otherwise have been in, had the inappropriate advice not been given. Generally speaking this is likely to mean that the consumer would have taken out a repayment mortgage, possibly with associated life cover. No compensation is due if the consumer is not worse off.
The calculation involves comparing the mortgage interest and endowment premiums actually paid, and the surrender value of the policy, with what would have been paid out under an equivalent repayment mortgage, and how much capital would have been repaid. A range of other factors may also need to be considered, such as the need for life assurance or whether the policy runs into retirement. Firms may also, in some circumstances, take into account 'savings' in assessing the amount of redress paid. This occurs where the monthly cost of an endowment mortgage was cheaper than the equivalent repayment mortgage. Firms that take account of savings have to explain this to consumers in writing.
If a consumer does not understand a compensation calculation, or they think there is an error in the calculation, they should contact the firm to ask for a breakdown of the figures. If they are still unhappy with the firm's response they can refer their complaint to the FOS.
The FOS has published information on its website about calculating redress in more complicated cases.
We are unable to investigate or review individual complaints. However, we do produce a consumer factsheet on mortgage endowment complaints, which includes more information on compensation.
Related information:
Complaints factsheet
FOS
I have been offered compensation but it doesn't amount to my shortfall -why is that?
The purpose of compensation is to
place the complainant, as far as possible, in the position they would
have been in today had the inappropriate advice not been given – usually
this means that the consumer would have taken out a repayment mortage
instead. Compensation is not based on what you expected the policy to be
worth.
Our consumer factsheet on mortgage endowment complaints, which covers compensation (and the FAQ above on how compensation is calculated) may be useful.
Related information:
Complaints factsheet
Our consumer factsheet on mortgage endowment complaints, which covers compensation (and the FAQ above on how compensation is calculated) may be useful.
Related information:
Complaints factsheet
The company investigating my complaint about mis-selling says it needs to take my current financial situation into account to determine the compensation I get. Is that right?
Redress for upheld mortgage
endowment complaints aims to put the complainant in the position they
would have been in had the inappropriate advice not been given. It does
not seek to penalise firms, or to award 'damages'. On this basis, our
rules and guidance (in the DISP Handbook) set out a standard approach to
calculating redress.
So, when assessing if you have suffered a loss, the firm should not only assess your relative capital shortfall or surplus, but also calculate the relative expense of the two repayment methods. If the monthly outgoings on your endowment mortgage are lower than an equivalent repayment mortgage, the firm may take account of such 'savings' in calculating redress.
The rules under which firms may be able to take account of 'savings' are detailed in DISP App 1.2.7 to 1.2.15G. If the firm does so, it must first establish your financial resources and assess if you are of 'sufficient means', and that it is reasonable to assume that the savings have contributed to those means. To do this, you must give the firm adequate information to evaluate your current financial resources, including any savings/deposits accumulated. We consider it fair for firms to request such information, including in the form of a questionnaire, provided it is relevant and not onerous.
If the firm establishes 'sufficient means' and deducts an amount for savings, it must explain to you in writing how it arrived at such a deduction, the information used and how the sufficient means test was satisfied (DISP App 1.2.12G ). You have the right to object to firms deducting savings (DISP App 1.2.13G).
Such assessments do not aim to penalise the complainant, but to ensure that redress reflects the financial loss incurred. The guidance is not intended to allow firms to unfairly reduce redress, and they must show that in taking account of savings they have not placed the complainant in a detrimental position. The circumstances in which firms may not take 'savings' into account, or where they must limit applying 'savings', are illustrated in DISP App 1.2.8 to 1.2.10G.
The guidance and rules issued in the DISP appendix do not relieve the firm of the obligation to use an alternative basis for calculation where the facts and circumstances of the case warrant it (DISP App 1.1.8G). We recognise that the test for 'sufficient means' is likely to be different depending on the circumstances and facts of the case, and firms have to adopt a test that is appropriate for that individual (DISP App 1.2.9G ).
So, when assessing if you have suffered a loss, the firm should not only assess your relative capital shortfall or surplus, but also calculate the relative expense of the two repayment methods. If the monthly outgoings on your endowment mortgage are lower than an equivalent repayment mortgage, the firm may take account of such 'savings' in calculating redress.
The rules under which firms may be able to take account of 'savings' are detailed in DISP App 1.2.7 to 1.2.15G. If the firm does so, it must first establish your financial resources and assess if you are of 'sufficient means', and that it is reasonable to assume that the savings have contributed to those means. To do this, you must give the firm adequate information to evaluate your current financial resources, including any savings/deposits accumulated. We consider it fair for firms to request such information, including in the form of a questionnaire, provided it is relevant and not onerous.
If the firm establishes 'sufficient means' and deducts an amount for savings, it must explain to you in writing how it arrived at such a deduction, the information used and how the sufficient means test was satisfied (DISP App 1.2.12G ). You have the right to object to firms deducting savings (DISP App 1.2.13G).
Such assessments do not aim to penalise the complainant, but to ensure that redress reflects the financial loss incurred. The guidance is not intended to allow firms to unfairly reduce redress, and they must show that in taking account of savings they have not placed the complainant in a detrimental position. The circumstances in which firms may not take 'savings' into account, or where they must limit applying 'savings', are illustrated in DISP App 1.2.8 to 1.2.10G.
The guidance and rules issued in the DISP appendix do not relieve the firm of the obligation to use an alternative basis for calculation where the facts and circumstances of the case warrant it (DISP App 1.1.8G). We recognise that the test for 'sufficient means' is likely to be different depending on the circumstances and facts of the case, and firms have to adopt a test that is appropriate for that individual (DISP App 1.2.9G ).
Why are policyholders receiving compensation now rather than at the end of the policy term? If they are retaining their policies are they able to benefit from any improvements in returns over time?
In most upheld cases the
complainant was recommended an endowment which carried greater risks
than they wanted to accept, or they were not made aware of the risks.
So, in most cases, complainants do not tend to keep the policy as a
repayment vehicle for a mortgage DISP App 1.3.2G and DISP App 1.2.15G
state it is not unreasonable for firms to assume that a complainant
will surrender their policy (without unreasonable cost) when calculating
compensation, but also assert a complainant's right to retain the
policy.
Anyone making the decision to keep an endowment policy after their complaint is upheld should be aware of the risks associated with the product. However, even if the policyholder should benefit from a future market upswing, this does not alter the history of the mis-sale, or the logic of any redress already paid.
Finally, our guidance (DISP App1.5.10G) offers scope for firms to offer an alternative form of redress, such as an agreement to guarantee, or 'underpin' the retained policy, rather than offer cash redress. This would allow the complainant to potentially benefit from an improvement in performance, while allowing them to keep the policy.
Anyone making the decision to keep an endowment policy after their complaint is upheld should be aware of the risks associated with the product. However, even if the policyholder should benefit from a future market upswing, this does not alter the history of the mis-sale, or the logic of any redress already paid.
Finally, our guidance (DISP App1.5.10G) offers scope for firms to offer an alternative form of redress, such as an agreement to guarantee, or 'underpin' the retained policy, rather than offer cash redress. This would allow the complainant to potentially benefit from an improvement in performance, while allowing them to keep the policy.
Complaints
I was sold an endowment mortgage by an independent financial adviser before April 1988. I have written to the firm and the Financial Ombudsman Service (FOS), but neither can investigate my complaint- why?
The advice and sales of certain financial products including mortgage endowments, did not become regulated until 29 April 1988.
The FOS may be able to adjudicate complaints about advice and sales before 29 April 1988 against firms who have agreed on a voluntary basis that they may do so. Most major firms (banks, building societies and life insurance companies) entered into such a voluntary agreement with the FOS.
However most independent financial advisers (IFAs) did not, so the FOS cannot consider a complaint against such a firm.
Firms who advised investors before 29 April 1988 have certain legal obligations to their clients. If the firm refuses to consider the complaint, or refutes any liability, then you may still be able to pursue a claim through the courts. You may wish to seek legal advice to see what options you may have.
If you were advised before 29 April 1988 but took out the policy after that date you may still be able to refer your complaint to the Ombudsman, even if the firm did not sign up to the voluntary agreements. Check with the Ombudsman if you are unsure.
Related links:
Complaints factsheet
The Financial Ombudsman Service
Financial Services Compensation Scheme (FSCS)
The FOS may be able to adjudicate complaints about advice and sales before 29 April 1988 against firms who have agreed on a voluntary basis that they may do so. Most major firms (banks, building societies and life insurance companies) entered into such a voluntary agreement with the FOS.
However most independent financial advisers (IFAs) did not, so the FOS cannot consider a complaint against such a firm.
Firms who advised investors before 29 April 1988 have certain legal obligations to their clients. If the firm refuses to consider the complaint, or refutes any liability, then you may still be able to pursue a claim through the courts. You may wish to seek legal advice to see what options you may have.
If you were advised before 29 April 1988 but took out the policy after that date you may still be able to refer your complaint to the Ombudsman, even if the firm did not sign up to the voluntary agreements. Check with the Ombudsman if you are unsure.
Related links:
Complaints factsheet
The Financial Ombudsman Service
Financial Services Compensation Scheme (FSCS)
I wish to make a complaint about investment advice I received in 1991, but the firm later stopped selling investments and did not become authorised by the FSA. Who should I complain to?
Firstly you should try to complain to the firm (or relevant contacts such as the adviser who sold you the product) in question.
If you are unhappy with the outcome, you may still be able to refer your complaint to the FOS. Secondary legislation under FSMA allows the FOS to consider certain complaints about events before 1 December 2001 (that is before the FOS became the single ombudsman scheme). Whether the complaint potentially falls within the FOS's jurisdiction will depend primarily on:
As you can see, the position is complicated. If you are unsure whether the FOS can consider a complaint, you should contact the FOS to check.
If the complaint is outside the FOS's jurisdiction, they cannot consider it, but you may still attempt to seek redress through the courts. If you are considering doing so, you may wish to seek legal advice about what options might be available.
The FSCS may be able to consider a complaint where a firm is judged to be in default that is unable, or likely to be unable, to meet a claim against it. If the firm in question has not been, or cannot be, judged to be in default then the FSCS will not be able to consider the complaint. Contact the FSCS to see if the firm has been declared in default
If you are unhappy with the outcome, you may still be able to refer your complaint to the FOS. Secondary legislation under FSMA allows the FOS to consider certain complaints about events before 1 December 2001 (that is before the FOS became the single ombudsman scheme). Whether the complaint potentially falls within the FOS's jurisdiction will depend primarily on:
- whether the firm was subject to a former scheme immediately before 1 December 2001. (broadly a former scheme is a complaints scheme of a former regulator which is covered by the secondary legislation); and
- whether the complaint was covered by that scheme; and
- whether you would have been entitled to bring the complaint to the former scheme.
As you can see, the position is complicated. If you are unsure whether the FOS can consider a complaint, you should contact the FOS to check.
| Former Regulator | Did the regulator have a complaints scheme which is a 'former scheme'? | Could the complaint fall under another 'former scheme'? |
| Personal Investment Authority | Yes - the PIA Ombudsman Bureau (PIAOB) | N/A |
| Financial Intermediaries, Managers and Brokers Regulatory Association (FIMBRA) | No | Certain complaints may have fallen within PIA's complaints scheme, PIAOB |
| Securities and Investments Board / Financial Services Authority (pre-1 December 2001) (FSA) | Yes - the FSA scheme | N/A |
| Investment Management Regulatory Organisation (IMRO) | Yes - the IMRO Ombudsman scheme | N/A |
| Insurance Brokers’ Registration Council (IBRC) | No | Certain complaints may have fallen within the FSA scheme |
| Securities and Futures Authority (SFA) | Yes – the SFA’s Complaints Bureau arrangements and Consumer Arbitration Scheme |
If the complaint is outside the FOS's jurisdiction, they cannot consider it, but you may still attempt to seek redress through the courts. If you are considering doing so, you may wish to seek legal advice about what options might be available.
The FSCS may be able to consider a complaint where a firm is judged to be in default that is unable, or likely to be unable, to meet a claim against it. If the firm in question has not been, or cannot be, judged to be in default then the FSCS will not be able to consider the complaint. Contact the FSCS to see if the firm has been declared in default
Financial Ombudsman Service and the Financial Service Compensation Scheme
The firm that sold me the endowment policy has stopped trading – who should I contact?
You can contact the Financial
Services Compensation Scheme (FSCS). The FSCS is a 'fund of last resort'
for consumers who have a claim against a firm that we regulate, but is
unable (or likely to be unable) to pay claims against it, often because
it has stopped trading.
The FSCS is unlikely to be able to help you if the advice was given before 28 August 1988.
The FSCS is unlikely to be able to help you if the advice was given before 28 August 1988.
What are the FSA/FOS/FSCS relationships and remit concerning mortgage endowment complaints?
The FSA, FOS and the FSCS are separate organisations set up under the Financial Services and Markets Act 2000.
FSA: In terms of the FSA’s responsibilities and relationship with the Financial Ombudsman Service (FOS), firstly we are responsible for supervising how authorised firms handle mortgage endowment complaints. We do this using the rules in our Dispute Resolution Sourcebook (DISP) which the FOS and FSCS take into account when considering individual cases. Secondly, we and the FOS (and where appropriate the Financial Services Compensation Scheme (FSCS)) work closely on endowment-related issues. Thirdly, we are responsible for ensuring the FOS has adequate resources to carry out its work. We do this by setting the levy on firms in respect of FOS activities.
FOS: The FOS deals with individual complaints from consumers against firms that are regulated by the FSA (or by one of the previous regulators) and it can require firms to pay compensation. It also offers a wide range of publications for consumers and firms including technical briefings which cover mortgage endowments.
FSCS: The FSCS can pay compensation to consumers with claims against authorised firms that have been declared in default by FSCS – that is they are financially unable (or likely to be unable) to pay the claim themselves.
The recently published tripartite guide provides useful information.
Related information:
The Financial Ombudsman Service (FOS)
Financial Services Compensation Scheme (FSCS)
Tripartite guide
FSA: In terms of the FSA’s responsibilities and relationship with the Financial Ombudsman Service (FOS), firstly we are responsible for supervising how authorised firms handle mortgage endowment complaints. We do this using the rules in our Dispute Resolution Sourcebook (DISP) which the FOS and FSCS take into account when considering individual cases. Secondly, we and the FOS (and where appropriate the Financial Services Compensation Scheme (FSCS)) work closely on endowment-related issues. Thirdly, we are responsible for ensuring the FOS has adequate resources to carry out its work. We do this by setting the levy on firms in respect of FOS activities.
FOS: The FOS deals with individual complaints from consumers against firms that are regulated by the FSA (or by one of the previous regulators) and it can require firms to pay compensation. It also offers a wide range of publications for consumers and firms including technical briefings which cover mortgage endowments.
FSCS: The FSCS can pay compensation to consumers with claims against authorised firms that have been declared in default by FSCS – that is they are financially unable (or likely to be unable) to pay the claim themselves.
The recently published tripartite guide provides useful information.
Related information:
The Financial Ombudsman Service (FOS)
Financial Services Compensation Scheme (FSCS)
Tripartite guide
The FOS has told me my complaint falls outside its jurisdiction – can the FSA help?
The FOS covers complaints about
financial products and services provided in (or from) the United Kingdom
– from insurance and pension plans to bank accounts and investments.
There are some complaints they do not normally deal with, for example
the way an investment has performed.
As the FOS is operationally independent of the FSA, we cannot intervene in any FOS decision-making processes or the outcome of any decision made by an adjudicator or ombudsman.
Related information:
The Financial Ombudsman Service (FOS)
As the FOS is operationally independent of the FSA, we cannot intervene in any FOS decision-making processes or the outcome of any decision made by an adjudicator or ombudsman.
Related information:
The Financial Ombudsman Service (FOS)
I am not happy with the FOS's decision - what can I do?
The FOS may take account of
requirements in our Dispute Resolution Complaints Handbook (DISP) when
considering individual cases, along with what was considered good
industry practice at the time, and any other relevant facts. In light of
this, we regularly meet the FOS to discuss common policy issues.
However it is operationally independent of the FSA so we cannot, and do
not, influence or intervene in FOS decisions on individual cases.
If you are unhappy with an adjudicator's decision on a case, you can refer it to the Ombudsman, whose decision is final. This does not stop you then seeking redress through the courts, but if you are considering this you may wish to take legal advice about what options may be available.
If you are unhappy with the way the FOS has handled your case – for instance, about what you consider to be unnecessary delays – you can ask the FOS's Service Review Team to review the case. If the FOS is then unable to resolve the case, you can refer it to the Independent Assessor, who considers complaints about the FOS's quality of service, but not the decisions it makes.
Related information:
The Financial Ombudsman Service (FOS)
If you are unhappy with an adjudicator's decision on a case, you can refer it to the Ombudsman, whose decision is final. This does not stop you then seeking redress through the courts, but if you are considering this you may wish to take legal advice about what options may be available.
If you are unhappy with the way the FOS has handled your case – for instance, about what you consider to be unnecessary delays – you can ask the FOS's Service Review Team to review the case. If the FOS is then unable to resolve the case, you can refer it to the Independent Assessor, who considers complaints about the FOS's quality of service, but not the decisions it makes.
Related information:
The Financial Ombudsman Service (FOS)
How long will the Financial Ombudsman Service (FOS) take to consider and resolve my mortgage endowment complaint?
This may depend on whether you and
the firm both agree, at an early stage, to any recommendation or
informal settlement that FOS might suggest – or whether either you or
the firm request the next, more formal stage of the FOS's process.
Disputes that involve a formal review and final decision by an ombudsman – the last stage of the process – take longer than cases settled by adjudicators making informal recommendations.
The FOS will keep you informed about progress on your case, so you know what is happening with your complaint.
At the FSA, we have taken several steps to ensure that firms consider complaints from consumers properly and promptly. This has included us monitoring firms' complaint-handling processes, and taking action where standards fail to meet our expectations. This should reduce the extent to which consumers then need to refer their complaint onto the FOS.
Related information:
The Financial Ombudsman Service (FOS)
Disputes that involve a formal review and final decision by an ombudsman – the last stage of the process – take longer than cases settled by adjudicators making informal recommendations.
The FOS will keep you informed about progress on your case, so you know what is happening with your complaint.
At the FSA, we have taken several steps to ensure that firms consider complaints from consumers properly and promptly. This has included us monitoring firms' complaint-handling processes, and taking action where standards fail to meet our expectations. This should reduce the extent to which consumers then need to refer their complaint onto the FOS.
Related information:
The Financial Ombudsman Service (FOS)
FSA's actions
Is the FSA just focusing on certain sectors of the market which sold the product?
We monitor all firms that sold
investment products, including life assurance companies, banks and
building societies, and IFAs; responsibility for any mis-selling lies
with the firm which gave the advice. We also review how firms treat
their customers after selling the policy; this includes ensuring that
firms provide sufficient post-sale information and they deal with any
customer complaints fairly and promptly.
What action is the FSA taking to ensure that only those policyholders with genuine complaints about the level of advice initially given are encouraged to pursue matters accordingly?
We have always been careful to
maintain a distinction between mis-selling issues and an investment
simply producing lower returns than expected. We have made it clear in
our consumer publications that having a shortfall does not in itself
mean the firm mis-sold the investment.
Indeed, the series of consumer factsheets we have issued since 1999 have not focused solely on making a complaint. In our consumer communications, such as the 'Act Now' campaign (2003), we emphasised that consumers should address the issue, equip themselves with the facts, and seek appropriate advice if necessary. The 'Act Now' campaign encouraged investors to take pro-active steps to review a potential shortfall. Over 1 million of the 2.2 million households with an endowment-linked mortgage and a potential shortfall have now taken action to deal with the shortfall, such as restructuring their mortgage, endowment policy or savings.
We do not presume that all the consumers who complain have grounds to prove they have been mis-sold. However, it is important that consumers have the right to complain and seek redress where appropriate. Further, we believe the opportunity to use a dispute resolution mechanism that is free to consumers mutually benefits firms and consumers by improving confidence in financial services.
Related links:
July 2005 Progress report
Indeed, the series of consumer factsheets we have issued since 1999 have not focused solely on making a complaint. In our consumer communications, such as the 'Act Now' campaign (2003), we emphasised that consumers should address the issue, equip themselves with the facts, and seek appropriate advice if necessary. The 'Act Now' campaign encouraged investors to take pro-active steps to review a potential shortfall. Over 1 million of the 2.2 million households with an endowment-linked mortgage and a potential shortfall have now taken action to deal with the shortfall, such as restructuring their mortgage, endowment policy or savings.
We do not presume that all the consumers who complain have grounds to prove they have been mis-sold. However, it is important that consumers have the right to complain and seek redress where appropriate. Further, we believe the opportunity to use a dispute resolution mechanism that is free to consumers mutually benefits firms and consumers by improving confidence in financial services.
Related links:
July 2005 Progress report
Is the FSA looking at firms' investment strategies as well as mis-selling?
Whether a policy is suitable
relates to the advice given and whether it was appropriate for that
individual. It might have been suitable but not have performed as well
as expected - poor investment performance is not in itself an indication
of mis-selling.
Principles 2 and 9 of our Principles for Businesses set out that:
We also require insurance companies to provide extra information to new clients so they can better understand how decisions will be taken on distributing profits and declaring bonuses. Since the beginning of 2006, we have required firms to give all policyholders a 'consumer friendly' version of their Principles and Practices of Financial Management (PPFM). The PPFM should cover the significant aspects of the firm's investment strategy. Its objective is to give consumers a better understanding of the way firms manage their with-profits business. This document particularly aims to improve the degree of understanding, and transparency of the 'smoothing' of with-profits policies.
We also have detailed point-of-sales rules which, among other things, require advisers to explain the potential risk of the investment they are recommending. We require firms to give Key Features documents to investors buying life policies, such as an endowment. This document explains in detail the aims of the policy, the sort of assets the company would invest in, and the potential risks associated with that investment, as well as other aspects such as costs and charges.
We are also responsible for ensuring that consumers receive adequate information on which to base financial decisions. A component of this is ensuring that firms pay due regard to the information needs of their customers and communicate with them in a way that is clear, fair and not misleading. This extends to ensuring that investors are aware of the risks of products, including how their money will be invested.
Related information:
Principles of Business
Principles 2 and 9 of our Principles for Businesses set out that:
- A firm must conduct its business with due skill, care and diligence.
- A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.
We also require insurance companies to provide extra information to new clients so they can better understand how decisions will be taken on distributing profits and declaring bonuses. Since the beginning of 2006, we have required firms to give all policyholders a 'consumer friendly' version of their Principles and Practices of Financial Management (PPFM). The PPFM should cover the significant aspects of the firm's investment strategy. Its objective is to give consumers a better understanding of the way firms manage their with-profits business. This document particularly aims to improve the degree of understanding, and transparency of the 'smoothing' of with-profits policies.
We also have detailed point-of-sales rules which, among other things, require advisers to explain the potential risk of the investment they are recommending. We require firms to give Key Features documents to investors buying life policies, such as an endowment. This document explains in detail the aims of the policy, the sort of assets the company would invest in, and the potential risks associated with that investment, as well as other aspects such as costs and charges.
We are also responsible for ensuring that consumers receive adequate information on which to base financial decisions. A component of this is ensuring that firms pay due regard to the information needs of their customers and communicate with them in a way that is clear, fair and not misleading. This extends to ensuring that investors are aware of the risks of products, including how their money will be invested.
Related information:
Principles of Business
Why didn't the FSA conduct an industry-wide review?
We have the power – under the
Financial Services and Markets Act 2000 (FSMA), which sets our powers
and responsibilities – to undertake an industry-wide review in response
to a perceived risk. However, we are required to act proportionally and
appropriately when applying our regulatory tools, and to ensure that the
projected costs of any action do not outweigh the benefits.
We decided not to undertake an industry-wide review of alleged endowment mis-selling, as we thought such a review would be needlessly expensive for firms and would deliver little additional benefit for consumers. The detailed reasoning for the decision can be found in chapter 4 of our progress report on mortgage endowments (October 2000).
In line with our proportionate, risk-based approach, we have adopted a targeted supervision policy. As we explained in our 2006 progress report, since July 2005 we have required 52 of the largest firms in the mortgage endowment market to provide us with greater levels of detail on a more regular basis on specialised mortgage endowment complaints data. From this we have required some firms to take remedial action to improve the quality of their complaint handling, including reviewing previously rejected complaints. We have also established that most firms have adequate contingency plans in place to handle surges in complaints volumes and required those that haven't to review and strengthen their existing arrangements.
Substantial progress has been made in terms of ensuring that firms handle complaints properly. We are conscious that endowments will remain a matter of real importance to consumers over the coming year as policies mature and individuals deal with shortfalls, and we stress that firms should not infer that we no longer see this subject as important. We will continue to monitor the market to ensure that firms are continuing to treat customers fairly. We will not hesitate to take action if firms and their senior management fail to do so. Enforcement action still remains an option for any firm that falls short of our requirements.
Related information:
Progress report December 2006 [PDF]
Progress report July 2005 [PDF]
October 2000 progress report
We decided not to undertake an industry-wide review of alleged endowment mis-selling, as we thought such a review would be needlessly expensive for firms and would deliver little additional benefit for consumers. The detailed reasoning for the decision can be found in chapter 4 of our progress report on mortgage endowments (October 2000).
In line with our proportionate, risk-based approach, we have adopted a targeted supervision policy. As we explained in our 2006 progress report, since July 2005 we have required 52 of the largest firms in the mortgage endowment market to provide us with greater levels of detail on a more regular basis on specialised mortgage endowment complaints data. From this we have required some firms to take remedial action to improve the quality of their complaint handling, including reviewing previously rejected complaints. We have also established that most firms have adequate contingency plans in place to handle surges in complaints volumes and required those that haven't to review and strengthen their existing arrangements.
Substantial progress has been made in terms of ensuring that firms handle complaints properly. We are conscious that endowments will remain a matter of real importance to consumers over the coming year as policies mature and individuals deal with shortfalls, and we stress that firms should not infer that we no longer see this subject as important. We will continue to monitor the market to ensure that firms are continuing to treat customers fairly. We will not hesitate to take action if firms and their senior management fail to do so. Enforcement action still remains an option for any firm that falls short of our requirements.
Related information:
Progress report December 2006 [PDF]
Progress report July 2005 [PDF]
October 2000 progress report
Projections between 1988 and 1994 including the 'LAUTRO charges' issue
Between 1988 and 1994, quotations were based on assumptions laid down by the regulator for both future rates of return and the charges/expenses to be used in the projections.
The premium charged was assessed
by the company using its own assumptions, including those for future
rates of return, charges and expenses.
Before April 1988, the practice of firms offering mortgage endowments and other 'with profits' policies was to assume a continuation of their previous bonus rates. This approach was reviewed and considered unsatisfactory, as it did not produce reasonable figures in times of changing economic conditions. Further, companies tended to use projections for competitive purposes.
From July 1988, projections became subject to regulation, and prescribed rates were outlined by LAUTRO. The regulator set standardised rates for growth projection, and standardised charges / expenses to be used in illustration of possible return. The main reason for this is that most with profit policies did not have fully disclosed charges but charged expenses against the with-profit funds. Projections had to state that these were possible returns using standardised charges. Actual charges would have been disclosed in the product particulars.
The expenses assumptions that LAUTRO stipulated were often lower than the firms' actual 'own charges' or expenses.. This had two effects:
By 1995, a basis had been developed to assess the expenses of with profits policies and from that time, it was a requirement for firms to use 'own charges' in projections.
Before April 1988, the practice of firms offering mortgage endowments and other 'with profits' policies was to assume a continuation of their previous bonus rates. This approach was reviewed and considered unsatisfactory, as it did not produce reasonable figures in times of changing economic conditions. Further, companies tended to use projections for competitive purposes.
From July 1988, projections became subject to regulation, and prescribed rates were outlined by LAUTRO. The regulator set standardised rates for growth projection, and standardised charges / expenses to be used in illustration of possible return. The main reason for this is that most with profit policies did not have fully disclosed charges but charged expenses against the with-profit funds. Projections had to state that these were possible returns using standardised charges. Actual charges would have been disclosed in the product particulars.
The expenses assumptions that LAUTRO stipulated were often lower than the firms' actual 'own charges' or expenses.. This had two effects:
- Where LAUTRO charges were lower than firms' actual charges, the performance required to actually achieve the sum assured / target value would need to be higher than that illustrated.
- Some firms used LAUTRO charges to set premiums. Given that actual deductions would have been far higher, this produced an artificially low premium, and required investments to significantly outperform the projections.
By 1995, a basis had been developed to assess the expenses of with profits policies and from that time, it was a requirement for firms to use 'own charges' in projections.
Projection rates
Some companies are quoting rates considerably lower (or higher) than 4%, 6% and 8%. Why is this?
Projections illustrating the
likely performance of investment policies have been subject to rules set
out by regulators since 1988. The purpose of projections is to inform
consumers of possible returns from the policies, given certain growth
assumptions, and taking into account eligible charges or expenses.
These are kept under review and were reduced to the current levels in 2000. However, these rates assume material investment in equity type assets. Where firms identify that their assets have a lower investment potential, they should use lower rates of return. We reminded firms of this in our Dear CEO letter of June 2003.
These are kept under review and were reduced to the current levels in 2000. However, these rates assume material investment in equity type assets. Where firms identify that their assets have a lower investment potential, they should use lower rates of return. We reminded firms of this in our Dear CEO letter of June 2003.
Scottish solicitors
I was sold an endowment mortgage by a firm of solicitors based in Scotland - who should I contact?
Complaints about the sale of
mortgage endowment by a firm of solicitors in Scotland should be
directed to the firm involved in the first instance. If the complaint is
not resolved satisfactorily and advice was given between 1 August 1988
and 30 November 2001, you should refer your complaint to the Law Society
of Scotland. Complaints about advice given before 1 August 1988 do not
fall within the scope of the Law Society of Scotland, as the investment
business rules allowing the Society to investigate a complaint against a
member were not in force until then.
The extent of the powers the Law Society of Scotland could exercise over its members has varied over the period in question, so the date the solicitor gave the advice is significant in establishing what the Society can do about the complaint.
Since 1 December 2001, solicitors offering financial advice have been regulated by the FSA, and a complaint relating to a solicitor allegedly mis-selling an endowment from this date can be referred to the FOS if you are unhappy with the firm's decision.
You should refer to the FSA Consumer website for more details including information on solicitors in England, Wales and Northern Ireland.
Related information:
FSA consumer information
The extent of the powers the Law Society of Scotland could exercise over its members has varied over the period in question, so the date the solicitor gave the advice is significant in establishing what the Society can do about the complaint.
Since 1 December 2001, solicitors offering financial advice have been regulated by the FSA, and a complaint relating to a solicitor allegedly mis-selling an endowment from this date can be referred to the FOS if you are unhappy with the firm's decision.
You should refer to the FSA Consumer website for more details including information on solicitors in England, Wales and Northern Ireland.
Related information:
FSA consumer information
Time-barring
I have been told my complaint has been time-barred. What does this mean and what can I do?
You can only make a complaint
about the sale of your endowment policy within certain time limits. If
you complain after these time limits a firm can usually reject your
complaint as being out of time – known as ‘time-barring’. It can also
ask the Ombudsman to reject the complaint on similar grounds. For
example, your complaint can be rejected if:
Related information:
Complaints factsheet
Timebarring review
- you receive a letter warning of a high risk of a shortfall; then receive a subsequent letter giving you at least six months’ notice of a ‘final date’ by which you have to complain; and
- that ‘final date’ is at least three years after the date you received the first letter (and at least six years since you bought the policy); but
- you complain only after that ‘final date’.
- there are exceptional circumstances; or
- the time bar was wrongly applied; or
- the time bar was unfair.
Related information:
Complaints factsheet
Timebarring review
I never got a warning of a 'final date' by which to complain, but have been time-barred by the firm anyway – is that right?
It can be, because our rules changed. So, if:
- you received a letter warning of a high risk of a shortfall before 1 June 2001; and
- you received a second or similar warning before 1 December 2003;
- six years from when you bought your policy; or
- three years from the date you received the first warning of a high risk of shortfall; or
- six months from the date you received the second or similar warning.
Why does the FSA allow consumers to refer complaints to the FOS, which would otherwise be time-barred by the 15 year 'Long Stop' provision in the Limitation Act (1980)?
We recently set out the position in a letter to the IFA Defence Union. The relevant extract is as follows:
"in some quarters, there is surprise that the Ombudsman is not subject to the 15 year long-stop limit that governs court claims in negligence. The Policy Statement [PS 158] ……covered this ground, noting that there was no requirement for the rules to follow the time limits for court claims (although, as a matter of policy, they generally do). The Statement also explained that, having regard to the long-term nature of retail financial services products (such as pensions and endowments), "we do not consider it is in the interests of consumers to rule out the possibility of complaints being dealt with outside the 15 year period that would apply to court cases. Nor do we consider this necessary to prevent hardship to firms".
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