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Claims for Mortgage Endowment Policy misselling (UK
only) ARTICLE JUNE 2006
This article discusses the current situation with
endowment mortgages in the UK. If you own an endowment
plan and have yet to take any action regarding a
possible shortfall, you must act quickly to rectify your
situation.
This document will help you to learn more about the
issues involved.
THE BACKGROUND
Endowment mortgage plans provided an alternative to
repayment mortgages and were introduced to the UK in the
1980’s.
An endowment mortgage combines an interest-only
mortgage and an investment usually based on stocks and
shares. Throughout the term of the mortgage the
policyholder pays only interest on the amount borrowed
on the mortgage and also pays a monthly premium for the
endowment policy which provides both an investment
component and in addition, life insurance cover. Many
endowment plans were sold with heavy emphasis on the
following: You would be able to repay the mortgage debt
within the term agreed.
Your mortgage payments would be cheaper because you
would only be paying interest on the loan. Your plan
would also deliver investment value over and above the
mortgage sum. You would also have death benefit or life
cover protecting you against the amount of the loan. The
above points were all feasible on paper but
unfortunately with the exception of the death benefit,
the main positives were completely dependent on how the
investment plan actually performed.
This “performance” element meant that no guarantees
could be given and the customer relied heavily on the
salesman / adviser to fully inform them about the risks
associated with such plans. Some customers were misled
by over zealous salesmen who did not discuss the
negatives of such policies in any detail. Many other
customers simply did not fully understand the concept of
endowments and did not appreciate the risks involved.
The fact that the plans were a cheap option compared to
repayment vehicles clearly did not help. The low costs
enticed many customers into signing up for a plan that
might not have been the best option for them in the long
run.
As interest rates hit double figures in the late
eighties and early nineties, the plans became ever more
popular. The stock market was stable and the early
history of endowment investments in the UK was generally
quite encouraging. During the years 2000-2003 however,
endowment investment plans suffered severely from the
downturn in the stock market. Around 70% of the
endowment funds began to haemorrhage profits and with
each year seemingly worse than the last, the situation
gradually deteriorated.
In recent years there has been a partial recovery for
some funds but the majority are now in decline with no
hope of meeting their targets for hard up endowment
policyholders. MAKING A COMPLAINT If your current plan
is failing and recent projections show a shortfall and
if you believe that you were misled during the selling
of the plan, then you should complain about the position
you now find yourself in.
If you haven’t received an update or projection
recently – make sure you demand one as soon as possible.
Many people can go years without receiving any news
on their plans. Do you know how your plan is performing?
WARNING LETTERS
As discussed above, every endowment policyholder
should receive a yearly update on their plan. The
projection letter should confirm whether the plan is on
target. It should set out different levels of “returns”
based on anticipated or possible performance and if
there is a shortfall you should be told.
The letter should also indicate what action you can
take to correct the situation if the plan is off target.
From June 2004 the Financial Ombudsman Service
introduced a colour coded warning mechanism that
endowment providers are supposed to use in order to warn
customers about any shortfall.
The intention was to clearly communicate bad news to
customers and ensure that they would be left in no doubt
that steps had to be taken to rectify the problem. If a
plan is likely fall short the provider must send a RED,
or AMBER letter. A “red letter” as the term suggests is
a serious warning and definite action should be taken by
the customer to rectify the problem. Amber letters
involve less serious shortfalls but must still be acted
upon to avoid problems further down the line. The colour
coded scheme also gave policyholders a number of options
that would allow them to rectify their situation. Such
options would usually include switching to a repayment
mortgage vehicle, waiting to see if the policy
investment levels improved or making a formal complaint.
A deadline for complaining should also be communicated
in the warning letter. All letters from an endowment
provider should be read and fully understood.
Policyholders should seek advice from the provider or an
independent
financial adviser if they have any concerns about
their plan.
YOU MAY BE RUNNING OUT OF TIME TO CLAIM
The time bar and why should people be concerned about
it? As revealed above since June 2004, endowment
providers have been required to set out a final date for
a complaint to be made. If a customer does not complain
to the provider by this date, they can refuse to attend
to the complaint.
The Ombudsman will be unlikely to intervene or
adjudicate on the issues because they would consider the
matter to be time barred in accordance with their rules.
The June 2004 “rule” sets the time limit for complaining
at 3 years from the firm’s first warning to the
consumer. This type of warning has become known in the
industry as a ‘red’ letter. It sets out the position and
mentions that there is a high risk of a shortfall. When
you read in the press that time is running out – this is
precisely what the comment refers to. Many people
wrongly believe that there is a single deadline or key
date beyond which everyone in the UK will be unable to
complain. The truth is that every provider will send
different warnings at different times. The three year
period applies on a case by case basis depending on when
the first warning letter was received by the customer.
It is worth pointing out that 2006 is an extremely
important year as far as time barring is concerned. This
is because the majority of endowment providers began to
communicate the first in a series of warning letters
during 2003. It follows that for many, the 3 year period
will soon expire. This is why many complaint handlers
have sought to bring to the public’s attention the fact
that time really is running out. For the majority of
those that have not yet made a complaint, this is most
definitely the case. All endowment providers now invoke
the time bar rule. Pre 1988 endowments Can a
policyholder complain if the policy was sold before
April 1988? The surprising answer is that YES you may be
able to complain but only against a bank, building
society or insurance company agent. Here we explain why.
On the 29th April 1988 the Financial Services Act 1986
was finally implemented in the UK.
Prior to this date all financial brokers (ie high
street independent financial advisers, estate agents
etc) were not regulated. This means that the Ombudsman
at the time had no control over the brokers and any
sales that were conducted by them fall outside of the
scope of the Ombudsman and the rules that applied at the
time. You cannot therefore complain to the Ombudsman
about any sale conducted by an independent broker prior
to the deadline of 29th April 1988. You can still
complain to the broker (if they are still in business)
and present your arguments but with no regulatory body
to back you up there is little hope of a positive reply.
You can only resort to legal action which would involve
costly litigation against the broker with an uncertain
outcome. You must distinguish between a sale conducted
by a broker and one conducted by a bank, building
society or insurance company agent. Such “salesmen” were
regulated to a degree at the time and the Ombudsman has
agreed to look at all complaints if they are presented
within the three years allowed (see above) There is
however a restriction on what elements you can actually
complain about because there were less requirements and
regulatory obligations to comply with at the time.
This means that the scope for argument is
substantially reduced. Notwithstanding this, many
complaints will still have a very reasonable chance of
success because the sales process was relatively
unsophisticated at the time. In summary – you can
complain about a bank, building society or insurance
agent (including tied agent) sale pre April 88, but the
prospects of complaining against an independent broker
are very slim indeed with legal action being the only
viable course. Any legal action will be subject to
issues of “limitation” and the time bar ruling.
POST APRIL 1988 ENDOWMENT POLICIES
If your plan was sold after 29th April 1988, it makes
no difference whether the sale was conducted by a high
street broker or by a larger financial organisation. All
transactions were subject to regulation and therefore
you have in theory, the right to complain about the plan
and the fact that you may have been the victim of
misselling. Your complaint must be made against the
person or company that sold the plan. If the person /
company is no longer in business this will pose further
problems for you in pursuing the complaint. This is
discussed in more detail below.
YOUR COMPLAINT
Once you have grasped the fundamentals described
above, you must then grasp how to approach and execute
your complaint.
You must firstly decide whether to: ·
Use a complaint handler or ·
Complain personally.
There is some useful information compiled by Which?
In their Consumer
Factsheet which is recommended reading. It is the
most concise and unbiased document available discussing
the pro’s and cons of using a complaints handler.
Always
address the complaint to the person or company that sold
you the plan.
This could be any one of the following “agents”:
Building society or bank staff who discussed the
mortgage and sold the endowment plan.
Insurance company
agents (ie either an employee of the life company
providing the plan or a “tied” agent of the company
who was only able to sell the company products)
High
street brokers which can include independent financial
advisers (IFA’s), estate agents and other financial
professionals.
Your complaint might include some of the
following key arguments (please be aware that this is
not an exhaustive list and there may be further grounds
for complaint based on your own circumstances):
Other
options for repaying the mortgage may not have been
discussed fully with you.
The adviser may not have
explained there was a risk the endowment would not meet
the target amount
The adviser may not have discussed in
full the funds the endowment was to be invested in.
The
adviser may not have properly established your attitude
to risk. The adviser may not have fully explained the
fees and charges on the policy
A fact find may not have
been completed during the sales process and therefore
the adviser would not have full knowledge of your
financial situation.
The endowment may stretch beyond
your retirement and the adviser / salesman may not have
ensured that you had income or funds to repay the
premiums.
You may have been persuaded by the adviser to
sell an existing endowment prior to starting your
current plan. This is known as “churning” and is
regarded as poor selling practice.
The adviser may have
promised that the policy would definitely pay off the
mortgage and there would be a lump sum in addition at
the end of the policy term
The Complaint should not just
focus on the obvious arguments about “promises” or
“guarantees” that have not been honoured and that have
now resulted in a shortfall. These promises were rarely
confirmed in writing and such issues can easily be dealt
with by the providers who will simply reject the
arguments.
The most effective arguments that can be used
in a standard complaint (ie not involving retirement or
churning issues) relate to the attitude to risk not
being properly checked / documented and the fact that
other mortgage options may not have been fully discussed
or again documented.
Please note – the arguments quoted
above mainly relate to issues covered by the new
regulations that came into force in April 1988. Prior to
this date the requirements of sale were far less
stringent and this may be used in argument by the
provider.
THE COMPLAINT PROCESS
The endowment provider
must acknowledge the complaint within 7 days. They must
then investigate the details of the complaint and within
4 weeks provide the customer with an update about the
investigation. The provider must then provide a final
response to the customer that deals with the individual
issues within 8 weeks. In practice most providers will
take longer than this because of the sheer volume of
complaints that are being received. Some providers /
companies are quicker than others in their complaint
handling methods. Some of the more efficient firms
include the Halifax, Norwich Union and Prudential. These
firms will generally respond within the eight week
period. The final response may contain an offer for
redress along with a full explanation of the reasons why
the complaint is upheld. Conversely if the complaint is
rejected, the provider must explain in detail precisely
why they have come to their decision.
REDRESS /
COMPENSATION
If the provider upholds the complaint, they
are obliged to make an offer of redress to place the
customer in the same position that they would have been
in had they chosen a repayment mortgage. The redress
calculation is known as an RU89. Most providers use
software to determine the calculation which can be very
complicated. They must factor in various factors such as
the fluctuating interest rates, whether a customer has
switched mortgage products (ie; discounted mortgage
products, trackers etc) and whether they have paid any
lump sums off the mortgage. The RU89 can very often be
only one part of a redress calculation. Additional
elements covering retirement, early redemption of the
mortgage or a previous switch to a repayment mortgage
can all involve secondary calculations which can
increase an offer of redress.
WHAT IF THE COMPENSATION
IS NOT ADEQUATE
Complainants can very often be
disappointed when they receive their redress proposal.
Expectations can sometimes be unreasonably high
particularly given the prominent figures and “easy
money” message delivered by some press advertising.
There is no easy money to be made, but you should be
able to receive an award that places you back in the
position you would have been had you opted for the
repayment vehicle. You can raise additional points with
the provider if you feel they have made an error or have
been unreasonable in their approach to the redress
proposal. If you are represented, your complaint handler
should do this for you and should be presenting further
arguments on your behalf. It is however rare for a
provider to revise a proposal unless a glaring error has
been made. If you do have a dispute with them regarding
the redress and they refuse to budge you must take the
matter further.
DISPUTES
If the offer of redress is
inadequate OR worse still, if no offer has been received
because the complaint has been rejected, you have two
options: 1) You can refer the matter to the
Ombudsman for adjudication. 2) You can take legal
advice and consider further action against the provider.
Option 1) is by far the simplest and most cost
effective. The Ombudsman process is very fair and
completely free. Please be aware that some complaint
handlers may want an enhanced fee for dealing with an
Ombudsman application. Option 2) is open to everyone but
likely to be very expensive unless you can secure a “No
win no fee” arrangement with a solicitor. This option is
not financially viable for most people.
THE OMBUDSMAN
The
Financial Ombudsman Service was set up by
legislation to help settle individual disputes between
consumers and financial firms. They can consider
complaints about a wide range of financial matters -
from insurance and mortgages to savings and
investments. The service is free to consumers. You must
complain to the firm first, before they can look at your
case. The Ombudsman will review the decision made by the
provider and determine whether they have been fair in
their dealings with you.
They will also determine
whether the decision is in accordance with the
guidelines laid down by the regulator the
Financial Services
Authority (FSA) to resolve disputes. There are
specific guidelines that must be followed in relation to
endowment complaints. The Ombudsman will also review the
offer of redress to determine its reasonableness.
THE
FINANCIAL SERVICES COMPENSATION SCHEME
If the company /
provider you are complaining about are no longer
trading, or have otherwise been declared in default by
the FSA, your case may be referred to the
FSCS. This only
applies to sales that took place after 28th August 1988.
LEGAL ACTION
Legal action is always the last resort and
is an option that is often suggested by the Ombudsman.
Unfortunately what the Ombudsman does not tell you is
that litigation against the endowment salesman or
company can be very expensive with an uncertain outcome.
Always seek advice from a solicitor on whether legal
action is a sensible option. Remember that the larger
companies will always defend their position in the
courts. They have no choice because one precedent in
favour of the customer will cause a panic in the
industry. There are some individuals who have been brave
enough to take on the might of the big financial
companies. One such cases that has been reported
recently involved Friends Provident who found themselves
on the losing side in a county court trial. They were
ordered to pay their policyholder £1500 after initially
seeking to rely on the time bar. This was a shot in the
arm for policyholders everywhere but it has not yet had
an impact on the industry as a whole. SUMMARY This
lengthy document should be red by all endowment
policyholders who have not yet made a complaint about
their plan.
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