ombudsman news
issue 3
March 2001
pre-Financial Services Act mortage endowments
was advice given after 29 April 1988?
The rules under which we deal with complaints about mortgage endowments
sold by banks and building societies will differ, depending when
any advice was given.
- If
advice was given by a bank or building society before 29 April
1988 – the date when the Financial Services Act 1986 came into
force – our banking and loans division deals with these complaints
under Banking Ombudsman Scheme or Building Societies Ombudsman
Scheme rules.
- If
advice was given after 29 April 1988, our investment division
deals with them, usually under Personal Investment Authority
Ombudsman Scheme rules.
The
distinction is important because the record keeping and "best
advice" requirements introduced by the Financial Services Act
only apply where advice was given after 29 April 1988. This is
often overlooked in media reports, which usually focus on policies
covered by the Financial Services Act.
Financial
Ombudsman Service briefing note
The Financial Ombudsman Service produced a briefing
note about its treatment of mortgage endowment complaints.
The final section deals with cases before 29 April 1988 – and
says:
The position is somewhat different for endowment contracts
where advice was given before 29 April 1988. The regulatory
requirements governing the conduct of investment business
(introduced under the Financial Services Act 1986)
did not apply. So complaints where the advice was
given before 29 April 1988 have to be dealt with according
to general legal principles.
The
principal issues are likely to be:
- did
the firm promise that a specified sum would be produced?
- was
any advice given?
- if
so, was the advice negligent?
- if
not, was the position misrepresented?
- was
there full and fair disclosure?
If
the firm gave what amounted to a contractual commitment
that the policy would produce a specified sum (eg
sufficient to pay off the associated mortgage loan),
it is likely to be held to be binding. As evidence
of such a binding commitment would be required, this
is likely to apply in only a small minority of cases.
Neither
the lender nor the policy provider was under a duty
to volunteer advice, even if the firm’s advertising
said that financial advice was available. But if the
firm actually gave advice (either voluntarily or on
request) it was under a duty to give that advice with
reasonable care and skill. That is to be judged in
the light of the circumstances as they were known
or should have been known at the time, without applying
the benefit of hindsight. If advice was requested
on a particular issue, it does not necessarily mean
the firm was obliged to volunteer advice on other
issues relating to the same investment.
Where
advice was given, it will be material to consider
whether or not the customer was told that there was
a risk that the policy might not produce sufficient
to pay off the mortgage. And in the absence of such
a warning, a further consideration will be what the
customer would have done if the extent of the risk
had been made clear.
Where
advice was given and the customer is unable to continue
paying the policy premiums for the full term of the
policy (in order to obtain the full benefit of the
terminal bonus), it will be material to consider whether
or not the advice took into account affordability
and the holder's likely ability to continue paying
the policy premiums. If the policy term runs into
retirement, the ability to fund the premiums after
retirement may have been a material consideration.
Even
if the firm did not give advice, it will be liable
if it misrepresented the position. Misrepresentation
can include only giving partial disclosure of the
material facts. The law requires that the consumer
be put in the position that he or she would have been
in if the misrepresentation had not been made – not
the position he or she would have been in if the misrepresentation
had been true.
jurisdiction
and compensation
The normal Banking Ombudsman Scheme and Building Societies Ombudsman
Scheme jurisdiction rules apply. So we would not necessarily investigate
a mortgage endowment complaint where there was no loss for which
we could award compensation. With pre-1988 policies this is often
the case.
This
begs the question of how we calculate whether there has been any
loss. We do this in the same way as our colleagues in the investment
division. If the firm were at fault, compensation would be calculated
in order to put the borrowers in the position they would have
been in if they had not acted on the bad advice or misrepresentation.
Usually this will involve comparing the borrowers’ actual position,
now, with what it would have been if they had taken out an equivalent
repayment mortgage.
- We
look at the present surrender value of the borrowers’ mortgage
endowment policy (the amount they would get if they cashed it
in). We compare this with the amount of capital they would have
paid off by now if they had taken a comparable repayment mortgage
instead, and we calculate if they are better or worse off.
- We
also look at the borrowers’ mortgage outgoings. We compare the
payments they have made until now on the endowment mortgage
with the payments they would have made until now if they had
taken a repayment mortgage instead. In doing this, we total
the monthly payments, without applying any notional interest
or discount.
- When
we calculate the outgoings on a repayment mortgage, we assume
the borrowers would have taken decreasing term life cover –
unless we are satisfied that they did not need life cover (eg where they had no dependants or already had plenty of life cover).
If
the borrowers are worse off as far as capital is concerned, but
better off on outgoings, we have to consider whether to take into
account the notional past saving in outgoings.
- Ordinarily,
notional past savings are not taken into account. The borrowers
will probably have spent them unknowingly on normal expenditure.
The borrowers should not have to account for such past savings.
- Exceptionally,
the borrowers will be of sufficient means that it is
reasonable to assume the notional past savings actually increased
their means. In such cases, the borrowers should have to account
for past savings to that extent (eg if they enhanced
a deposit account balance). This could mean that it will only
be reasonable to take part of the past savings into account.
This
produces a variety of results:
- Borrowers
better off as far as both capital and outgoings are concerned.
There is no loss. The borrowers are better off overall.
For example
Mr and Mrs A’s endowment policy has a surrender value
of £11,000.
The capital that would have been repaid on a repayment mortgage
is £10,000.
They are £1,000 better off on capital. The total payments
to date on their endowment mortgage are £30,000.
The total payments to date on a repayment mortgage would
have been £31,000. Mr and Mrs A are £1,000 better off
on outgoings.
They
are £2,000 better off overall.
- Borrowers better off on capital and worse off on outgoings,
and their gain on capital is more than their loss on outgoings.
There is no loss. The borrowers are better off overall.
For example
Mr and Mrs B’s endowment policy has a surrender value
of £12,000.
The capital that would have been repaid on a repayment mortgage
is £10,000.
They are £2,000 better off on capital.
The total payments to date on their endowment mortgage are
£30,000.
The total payments to date on a repayment mortgage would have
been £29,000.
Mr and Mrs B are £1,000 worse off on outgoings.
They are £1,000 better off overall.
- Borrowers
better off on capital and worse off on outgoings, and
their gain on capital is less than their loss on outgoings.
The borrowers have lost the amount by which the outgoings
loss exceeds the capital gain.
For
example
Mr and Mrs C’s endowment policy has a surrender value
of £11,000.
The capital that would have been repaid on a repayment mortgage
is £10,000.
Mr and Mrs C are £1,000 better off on capital.
The total payments to date on their endowment mortgage are
£30,000.
The total payments to date on a repayment mortgage would have
been £28,000.
Mr and Mrs C are £2,000 worse off on outgoings.
They are £1,000 worse off overall.
- Borrowers
worse off on capital and worse off on outgoings. They
have lost the total of the capital loss and the outgoings
loss.
For example
Mr and Mrs D’s endowment policy has a surrender value
of £10,000.
The capital that would have been repaid on a repayment mortgage
is £11,000.
Mr and Mrs D are £1,000 worse off on capital.
The total payments to date on their endowment mortgage are
£30,000.
The total payments to date on a repayment mortgage would
have been £29,000.
Mr and Mrs D are £1,000 worse off on outgoings.
They are £2,000 worse off overall.
- Borrowers
worse off on capital and better off on outgoings, and
the loss on capital is more than the gain on outgoings.
The borrowers have suffered the capital loss. The outgoings
gain is deducted only if the borrowers are of sufficient
means.
For example
Mr and Mrs E’s endowment policy has a surrender value
of £10,000.
The capital that would have been repaid on a repayment mortgage
is £12,000.
Mr and Mrs E are £2,000 worse off on capital. The total
payments to date on their endowment mortgage are £30,000.
The total payments to date on a repayment mortgage would
have been £31,000.
Mr and Mrs E are £1,000 better off on outgoings.
Ordinarily, they would be treated as having incurred a loss of £2,000.
Exceptionally, if they were of sufficient means, they would be treated
as having incurred a net loss of between £1,000 and
£2,000, depending on how much of the past savings it
would be reasonable to take into account.
- Borrowers
worse off on capital and better off on outgoings, and
the loss on capital is less than the gain on outgoings.
The borrowers have suffered the capital loss. The outgoings
gain is deducted only if the borrowers are of sufficient
means.
For example
Mr and Mrs F’s endowment policy has a surrender value
of £10,000.
The capital that would have been repaid on a repayment mortgage
is £11,000.
Mr and Mrs F are £1,000 worse off on capital.
The total payments to date on their endowment mortgage are
£30,000.
The total payments to date on a repayment mortgage would
have been £32,000.
Mr and Mrs F are £2,000 better off on outgoings.
Ordinarily, they would be treated as having incurred a loss of £1,000.
Exceptionally, if they were of sufficient means, they would be treated
as having incurred either a loss or a net gain – ranging
from a £1,000 loss to a £1,000 gain, depending on how
much of the past savings it would be reasonable to take
into account.
Where the borrowers have incurred a loss, and the firm was at fault,
compensation would comprise the total of:
- the amount of the loss; and
- the cost of swapping to a repayment mortgage (assumed to be £250
unless some other figure is demonstrated); and
- any appropriate amount for inconvenience.
