Barmy FSA Regulation

Barmy FSA Regulation

The Treasury Select Committee has published their report based on their inquiry into inherited estates. The Committee is none too complimentary about the Financial Services Authority’s (FSA) regulation of the with-profits industry.

Quote:

"The Committee concludes that the Financial Services Authority (FSA) is not providing a robust enough framework to manage the conflicts of interest inherent in proprietary life funds."

I am hardly surprised, the FSA's "regulation" has been all but non existent.

Chairman of the Committee, the Rt Hon John McFall MP said:

"The approach taken by the FSA towards inherited estates seems a long way from the philosophy of 'principles-based regulation' to which it aspires. Policyholders need to have confidence that their interests are being protected, but the current oversight by the FSA gives no such assurance.

Policyholders deserve a regulatory framework based on a clear set of principles and unambiguous guidance on how inherited estate can be used by life firms’ management."

He refers to FSA regulation as "barmy":

"Shareholder tax is another example of the FSA's barmy regulation in this field."

He then goes on to put a well aimed boot into Prudential:

"I was astonished that the Prudential had taken £1.6 billion from their inherited estate to pay the costs of compensation arising from mis-selling."

Then Norwich Union:

"Tens of thousands of Norwich Union’s longest-standing policyholders do not stand to receive the whole value of the recently announced special distribution. The Committee was not convinced by the argument that such phasing of payments was necessary for the stability of the funds concerned.

In my view, phasing represents an unreasonable barrier for policyholders wishing to exit the fund."

The Committee calls on the FSA to take action in several areas to ensure that policyholders interests are protected, including the following:

• To ensure that a fair price is offered in a re attribution, not just an adequate price.



• To provide a very strong case about why the phasing of special distribution payouts should be permitted, noting that the FSA has yet to put forward an adequate case.



• To consult on a redesign of the overall regulatory system for with-profits funds during 2008. The Committee said that they are not satisfied that the FSA has done enough to provide a robust framework.



• To consult on the charging of shareholder tax to the inherited estate by the end of 2008, noting that their view is that it should not be permitted.

The full report can be downloaded from this link Treasury Select Committee.

It is clear that those with money stuck in these lousy endowment funds have been ill served by the FSA. It really is worth, in my view, considering mounting a class action against the FSA and the life assurance companies for this disgraceful situation.

Norwich Union Deadlock

Norwich Union Deadlock

The negotiations over the fate of the orphan assets of Norwich Union have become deadlocked.

As such the task of freeing up the deadlock has fallen to John McFall, chairman of the Treasury Select Committee.

Norwich Union are refusing to offer policyholders anymore. However, policyholder advocate Clare Spottiswoode is standing firm against the current offer on the table by Norwich Union.

Norwich Union have surplus (orphan) assets of £5BN (aka "inherited estate"). They are using £2.1BN to increase the value of policyholders' assets over the coming 3 years.

However, the dispute centres around what will happen to another £2.7BN.

The argument is focused on whether it is right for Norwich to use the money in ways that do not benefit policyholders, eg instance paying tax or financing growth.

The danger is that Norwich walk away from the negotiations and keep this £2.7BN for themselves.

Sir Nicholas Montagu

Sir Nicholas Montagu

Liberal Democrat Treasury spokesman, Vince Cable, has questioned the impartiality, effectiveness and independence of the Norwich Union With-Profits Committee (set up to protect the interests of policyholders).

He is concerned about Norwich Union's plans to distribute a proportion of its inherited estate to policyholders over three years, as opposed to a one off lump sum payment.

Mr Cable wrote to Sir Nicholas Montagu, chairman of the committee, questioning the committee's role in allowing the special bonus to be phased over three years.

Quote:

"Your committee has been established to protect the interests of policyholders and yet in your first public act you seem to have destroyed any prospect of being seen as a credible champion for them."

Montagu, a former civil servant who presided over the Inland Revenue during a period of bungles and who now gives after-dinner speeches for £5K a time, is seemingly reluctant to answer questions from "This Is Money" about this decision.

However, Montagu is paid from policyholders' funds to safeguard their interests therefore he is obliged to answer questions from policyholders.

Policyholders should send their complaints, comments and any queries relating to his role to:

Sir Nicholas Montagu,
Norwich Union With-Profits Committee,
Norwich Union Life,
2 Rougier Street,
York
YO90 1UU.

With-profits committees, if they are to really serve the policyholders that they claim to represent, need to be independent, impartial and effective.

It would appear that some fall short of this.

Call For Evidence

Call For Evidence

In a move designed to ensure that another endowment related scandal does not occur, the Treasury Select Committee has called for written evidence as part of its inquiry into the orphan assets (Inherited Estate) held by life companies' with-profits endowment funds.

The call comes as concerns are raised over the actions of AXA, Prudential and Norwich Union as they attempt to re attribute their Inherited Estates.

These assets are worth billions of pounds yet, despite these funds being contributed by policyholders, some insurance companies have been using a portion of them for the benefit of their shareholders rather than policyholders.

In 2000 AXA paid out a paltry 31% of its inherited estate to policyholders, this gave rise to the FSA to creating the post of Policyholder Advocate.

Claire Spottiswoode, Policy Advocate, is currently acting on behalf of Norwich Union policyholders.

Ms Spottiswoode, who is not happy with the current plans by Norwich Union (eg to pay the policyholders their share over 3 years), has welcomed the call for evidence:

"Foremost among the issues will be the way in which the FSA allows companies to subsidise the writing of new business, which has the effect in a re attribution of transferring value from the estate directly to shareholders.

Further, the way in which the FSA allows companies to pay shareholder tax from the estate is costly to policyholders and requires explanation."

The committee would like to hear about the following areas:

• The regulatory definition of the inherited estate in a with-profits fund.



• The extent to which life assurance companies should be permitted to diminish inherited estate in order to subsidise corporate activity, including financing new business, making strategic investments, paying shareholder tax and paying the costs of compensation for mis-selling.



• Whether allowing life assurance companies to use inherited estate to subsidise corporate activity has any adverse effects on competition.



• The principles that should guide the division of inherited estates in 90:10 funds between policyholders and shareholders upon re attribution of the estate.



• The appropriate sharing of inherited estate between current and future policyholders.



• Whether policyholders' reasonable expectations of distributions from inherited estate should be zero or have a positive value.



• Whether any distribution of benefits from the inherited estate should be made in a single payment or phased over several years.



• The role and responsibilities of the Policyholder Advocate.



• The framework for negotiation between the Policyholder Advocate and the life assurance companies.



• The role of the with-profits committees of life assurance companies.



• The approach of the Financial Services Authority to the issue of inherited estate.

Written evidence should be sent to the committee at this address Parliamentary Committee.

The Endowment Mortgage Crisis

The Endowment Mortgage Crisis

It is not with any exaggeration that the mis-selling of mortgage endowment policies is being described by many as the worst financial scandal in Britain of the last 30 years.

However, quite disgustingly the life assurance industry has done its best to wipe it hands of the matter; by trying to apportion blame on those who took out these useless underperforming products.

It is estimated that around 2.2 million people are facing shortfalls averaging £7,000.

The average payout on a £50 monthly 25-year policy has halved from £98,000 in 1992 to just £48,000 today.

Companies guilty of mis-selling have already paid out 2.3BN in compensation to over 1.5 million people.

The House of Commons Treasury Select Committee conducted an investigation into mortgage endowment mis-selling and issued a damning indictment of the industry.

The Chairman, John McFall, said:

"The effects of mortgage endowment mis-selling will be felt for at least another 10 years as these policies fall due for repayment.

It is absolutely vital that homebuyers who were mis-sold lodge a claim for compensation before the time bars come down.

Otherwise they will have even greater difficulty coping with payment shortfalls.

The lesson for the financial services industry is to be always simple and straightforward in its future dealings with the public.

I hope that going forward they have learned from this cathartic experience."

The lesson has clearly not been learned, as the life assurance industry is refusing to do the one thing that would restore people's faith in it, and eliminate the crisis that is causing misery to millions, namely underwrite these useless products.

Scots May Get Compensation

Scots May Get Compensation

Scots who claim they have been mis-sold endowment mortgages, may finally be compensated.

They have taken their dispute to Westminster, where MPs have signed a Commons motion demanding an end to a loophole which currently means that Scots who bought policies through lawyers are not due any settlements.

The House of Commons Treasury Select Committee is also calling for urgent action.

Scots who bought endowment policies through solicitors before December 1 2001, do not qualify for compensation from the Financial Ombudsman Service.

This was the date when the Financial Services and Markets Act came into effect.

This also means Scots who were mis-sold endowment policies by lawyers before the 2001 deadline, can only receive £1K maximum payout set by the Law Society.

Three Cheers for Liverpool Victoria

Three Cheers for Liverpool Victoria

Liverpool Victoria, the UK's largest friendly society, announced this week that all of its currently maturing mortgage endowment policies would receive a surplus on top of the mortgage amount covered.

In other words, those who hold endowment polices with Liverpool Victoria will receive a small profit over and above the mortgage.

Malcolm Berryman, Liverpool Victoria's group chief executive, said:

"The strong performance of our with-profits fund has ensured a surplus for all of our mortgage endowment policies that have matured or are currently maturing..In addition, our unconditional guarantee gives total peace of mind to our members for the future...."

Liverpool Victoria confirmed that none of its 6,000 mortgage endowment policyholders will suffer a shortfall, whatever happens to future investment returns.

It has made a financial provision to cover this guarantee, this will not have any adverse impact on future financial performance.

Now let us compare this excellent piece of news, with the dismal announcements made by the life assurance industry recently.

• AXA has announced that it will be reducing their payouts



• Standard Life will reduce its payouts to its 2.4M policy holders



• The Actuarial Profession, the body which represents those who run with-profits funds, has warned that the majority of customers will face falls in value of their policies for several years to come

Now it is not unreasonable to ask, how is it that one company can actually generate a profit for its policy holders; whilst the others only seem to be able to generate losses for their hapless endowment policy holders?

After all, they have all faced the same declining stock market!

The answer lies in the manner in which the companies manage their funds. Liverpool Victoria were more cautious when it came to paying out vast annual bonuses, in years of high returns.

They understood the concept of "with profits", namely that the profits made in one year should be used to smooth returns in the years of poor performance.

Unfortunately, it seems that many other "big names" in the "profession" chose to go for big bonuses in order to attract customers.

Needless to say, famine follows feast; when the stock markets started to fall, and with it investment returns, these companies that had paid out super inflated bonuses had nothing left in the cupboard to smooth things over with in the lean years.

I would argue that, in addition to persuing these companies for "mis-selling" polices, people, the FSA and the Treasury Select Committee should be going after them for mismanaging the funds.

After all if one company can produce a surplus whilst operating in the exactly the same market, why couldn't the others?

Formal Complaint

I have made a formal complaint to the Financial Ombudsman Service, about the obstructive and unhelpful attitude of my life assurance company; in respect of my enquiry about commission payments made on my endowment policies.

I have also copied all correspondence on this matter to the Treasury Select Committee.

Renewal Commissions

I received an interesting email from the Consumers' Association, in respect of my earlier post on "Secret Commission Payments".

It seems that these payments, also called renewal commissions, are quite common. The Consumers' Association believe that they should be stopped.

Indeed the Treasury Select Committee are also of the same mind.

Their cross examination of some of the representatives of the endowment industry, in January 2004, makes amusing reading; as they make the endowment people squirm, as they try to justify these payments.

You can read the minutes here.

I wrote to the Treasury Select Committee a while ago, alerting them to the existence of this site.

I received a reply on Friday.

Here is an extract of the reply, received from the Senior Clerk to the Treasury Select Committee:

"....I have made your comments, together with the address of your endowment diary, available to all members of the Committee..."

Could be interesting.

Red Alert High Risk of Shortfall

That is the opening line of the letter that I received today, from the life assurance company that "manages" my two endowment policies.

This "red alert" is in respect of my second endowment policy taken out in 1991, and due to expire in 2012.

The policy was originally meant to cover a mortgage of £39700.

Today's "prediction" shows that it is likely to produce a shortfall of up to £14500, that is about 36% of the target amount.

How these people can call themselves professionals is beyond me.

The letter then helpfully suggests that I may need to take action, other than just suing the idiots who designed this worthless product.

To add insult to injury, one of their suggestions is that I may like to top up my endowment plan.

Who are they trying to kid?

Having been castigated by the press, the FSA and the Treasury Select Committee for mis-selling worthless products; our ever resourceful "professionals" now seek to make another quick buck, by trying to persuade people to put more money into these underperforming white elephants.

This strikes me as being another blatant example of mis-selling.

Petition Launched

The Treasury Select Committee have reported that Britain's financial services industry is failing the consumer; ie that it is "crap".

Those of us holding underperforming endowment policies didn't need the Committee to tell us that, we knew that already!

I have today launched an electronic petition; pointing out that endowments were sold like TV's and cars, not investments. In view of this, it is my belief that issues regarding the mis-selling and underperformance of these policies should come under the remit of consumer legislation not the FSA.

If you would like to view, and sign the petition, please visit Compensation for Endowment Mis-selling.

Spread the word!

Thanks.

It seems that the Nationwide Building Society has a had a change of heart; regarding its treatment of people who have complained about mis-sold endowment polices, after the three year deadline.

The Treasury Select Committee, investigating the mis-selling of endowment policies, made it clear a month ago that the time bar rule should be discarded.

However, until recently the Nationwide had been disbarring late claimants. Now, following the Treasury Committee ruling and FSA rule changes in respect of warning letters, the Nationwide are reported to be writing to everyone they have time barred offering to investigate their complaints.

It is reported that the Royal & Sun Alliance has imposed a time limit, preventing customers who may have been mis-sold a mortgage endowment policy from complaining.

They claim that they are reconsidering their approach.

I understand that the other main endowment companies claim that they do not apply time limits.

However, the Financial Ombudsman Service (FOS) believes that the majority of companies do apply time limits.

There seems to be a "confusion of facts" here!

It is reported that the Select Treasury committee will investigate this, when it sits in the next fortnight.

I would say that the reputation of the Financial Services industry must be pretty well in tatters now. There is a report circulating that people are not saving enough for their retirement.

Given the endowment policy mis-selling scandal, why on earth would anyone trust these guys again with their pensions?

Would you?

Missed The Boat

It seems that about 700000 people, out of the total of 8.5M who hold endowment policies, may have missed the deadline to lodge a complaint for mis-selling.

These figures come from the Treasury, so they are probably reasonably accurate.

The chairman of the Select Committee, John MacFall, is reported to have described the fact that so many people didn't know of the time bar as "inexcusable".

The Financial Services Authority (FSA) is understood to be trying to persuade companies operating a time bar to reconsider their approach. Some of the endowment companies have agreed to waive the time bar.

The committee has also raised the issue of people sold endowment mortgages before 1988. As we all know, the ombudsman cannot consider these complaints because there was no voluntary code or scheme covering their activities before 1988.

The Select Committee is worried that this lack of action wrt pre 1988 policies will harm the reputation of the financial services industry.

I would suggest that the 8 million people facing shortfalls on their endowment policies already think that the financial services industry is pretty poor, whether the FSA deals with the complaints or not.

It seems that there are no stats available on the number of people turned away by the Ombudsman for trying to complain about pre 1988 endowments. The estimate is 1.2M, that's a lot of unhappy people!

Let's give them some stats!

Write to the Select Committee, if you were turned away because your policy was sold pre 1988.

There is a small crumb of comfort, the FSA and government are exploring options for voluntary help for people with pre 1988 policies.

However, don't hold your breath folks, that is a "cop out" in my view.

I understand that some of the UK's actuaries have taken a dislike to the Treasury Select Committee's investigation into the endowment policy mis-selling scandal.

They have branded it a "circus" after a heated and aggressive hearing. What is aggressive to some, is critical analysis to others.

My message to the Select Committee is simple; "keep up the good work!".

I should also mention, for the benefit of the companies that sold these underperforming endowment policies (who I know visit this site on an occasional basis), that "The Endowment Diary" has been brought to the attention of the members of the Treasury Select Committee; who reported last week on the endowment mis-selling scandal.

Their full report can be viewed here.

Following on from the Treasury Select Committee report into endowment mortgages (the full report can be viewed here), the Association of British Insurers (ABI) issued a press release in which it stated that it would be taking a number of steps:

• The ABI Code on Mortgage Endowments will be revised in consultation with the FSA and other stakeholders and re-issued as soon as possible. Recommendations from the Select Committee will be considered as part of this process.



• The industry is now in the process of sending out a third round of re-projection letters. The ABI will continue to consult on ways of improving all communications with policyholders. The industry is committed to providing the right information to enable customers to take prompt and appropriate action.



• The industry is also committed to handling complaints fairly and promptly. The ABI will work to make improvements in complaints handling wherever these are needed, in consultation with the FSA and the Financial Ombudsman. We will consider the Committee’s suggestions as part of that process.



• The ABI will shortly produce guidance for member companies to use when communicating with customers following a complaint and any award of compensation.



• The industry recognises the need for accurate data and, with the FSA, has already provided a great deal of statistical material to the Select Committee. The ABI will work with the FSA to improve the data further. In particular, we will examine what actions customers have taken as a result of receiving re-projection letters and will update research on the numbers of endowment policies that are still being used to pay off a mortgage.

I welcome steps to improve the situation. However, this problem affects some 6 million people; I don't see that the above steps, other than improving communication, address the fundamental issue.

Namely, endowment polices were not sold as investments but as products; such as cars or TV's.

When a new car or TV breaks down (ie it is not "fit for purpose") you return it to the manufacturer and get it fixed, or a replacement that works.

Endowment policies have been shown to be "not fit for purpose" (they will not pay off the mortage), the 6 million people facing a shortfall need to have a product that works; ie something that will pay off their mortgage.

The insurance industry needs to come up with a solution; otherwise we will see both the collapse of the housing market, and the destruction of the insurance industry, as these policies and their associated shortfalls crystalise.

I received an email today; not untypical of the many I have received over the past 18 months, since I started writing "The Endowment Diary".

It seems that the firms that sold and provided these endowment policies wish to wash their hands of the whole affair. This despite the fact that these policies have been proven to be not "fit for purpose" in paying off the mortgage debt they were allegedly designed to cover.

Here is an edited extract of the note I received, and my reply:

"...Hi , just reading your diary. I am in the same position as you, but my shortfall is £23600 ish it was sold by an ifa to me.

The ifa no longer exists, **** tell me it's not their problem I have to take legal action against the ifa.

The fsa won't look at anything sold before August 1988. Like the nursery rhyme " round and round in circles ".

I am continuing my fight for compensation....."


My reply:

"...Sorry to hear of your shortfall, but there are a lot of us about in a similar position!

Seems that despite the Treasury Select Committee et al, the firms that sold us these products will not admit to their "sharp practice".

Please feel free to revisit the site to see how I am getting along; by all means pass on the details to your friends and colleagues...."

I see that the Treasury Select Committee report into the endowment policies mis-selling scandal has come out today.

The report has accused the financial services industry of a myriad of failings including:

• Failings in policy sales



• Failings in asset management



• Failings in informing people

Apparently, a staggering 80% of policies now face shortfalls. The grand total of these shortfalls is expected to come to £40BN. That, in my view, could have a pretty serious effect on the British economy.

The Association of British Insurers (ABI), by all accounts, has said that they are “disappointed” that the changes made in the industry have not been recognised.

Not withstanding that “robust” response from the ABI; more alarmingly, the report notes that the problem will worsen over the coming years as the endowment policies mature.

In my view, this is a time bomb under the already overheated housing market.