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complaints
about ‘guarantees’ for mortgage endowment
policies
14/11
Mr and Mrs B complained about the mortgage endowment
policy they were sold in 1991. They said the adviser
had not mentioned that there was any risk of the policy
not producing the sum they needed. He had told them
that the policy would not only enable them to repay
their mortgage in full, but also provide them with a
lump sum.
The firm accepted liability since there was insufficient
evidence from the time of the sale to establish whether
the adviser had properly assessed the couple’s
attitude to risk. It made them an offer in accordance
with Regulatory Update 89.
Initially, the couple rejected this offer and referred
the matter to us. However, after we wrote to Mr and
Mrs B to confirm that the firm had calculated redress
appropriately and that – in our view – the
offer was fair and reasonable, they accepted it.
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14/12
When Mr and Mrs D were sold an endowment policy in 1986,
the adviser gave them a handwritten ‘quotation’,
setting out the amount they would receive when the policy
matured. They complained after receiving a ‘re-projection’
letter from the firm, telling them that the policy might
not pay off their mortgage. Mr and Mrs D felt that the
firm should honour the amount on the ‘quotation’.
The ‘quotation’ was set out on the firm’s
headed paper, and said:
Return
= £23,612 MIN @ 25 yrs
Mortgage = £11,000
£12,612 Cash in hand tax-free.
The figures were based on the value of similar policies
that had matured in 1986, and the firm felt they did
not constitute a guarantee. However, there was no evidence
that the adviser had provided any disclaimers that could
have brought the ‘quotation’ into doubt.
There was also no evidence to suggest that, at the time
of sale, Mr and Mrs D’s occupations, or investment
experience, would have given them sufficient knowledge
to question the advice they received.
The sale took place before the Financial Services Act
1986 came into force, so the sales procedure and documentation
were much less detailed than they are now. This, allied
to Mr and Mrs D’s lack of experience in financial
matters, led us to the view that they could not reasonably
have been expected to know that the information they
were given was incorrect, or that the firm did not provide
guarantees for this product.
We upheld the complaint. We decided that the firm should
honour its ‘guarantee’ and pay the couple
at least £23,612, provided the couple maintained
their payments until the policy matured.
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14/13
In September 1990, Miss K was advised to take out a
unit-linked endowment policy to cover her mortgage.
She said she was told that the policy did not carry
any risk and was guaranteed to repay her mortgage. She
was a single, first-time buyer, on an average income
and not in the position to take any risk with her money.
She was therefore alarmed to learn, in August last year,
that the policy was not guaranteed to repay her mortgage
and was forecast to produce less than she needed. This
prompted her to complain about the advice she was given.
The firm upheld her complaint, as it was unable to trace
any documents from the time of the sale. It offered
Miss K a refund of the premiums, plus interest at the
rates we recommend. Miss K decided to refer the matter
to us.
Since the firm appeared to have accepted liability,
we looked at whether its offer was appropriate. We found
it had not followed the guidance in Regulatory Update
89 when it carried out the calculations for compensation.
As a result, it had offered Miss K less than the amount
she was entitled to. The firm revised its offer and
Miss K accepted.
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complaints about other investment matters
14/14
Mr and Mrs N obtained a staff mortgage through Mrs N’s
employer, at a substantially discounted interest rate.
Mrs N received commission on the sale. No financial
advice was given to the couple, but it was a condition
of the deal that employees had to take out an endowment
policy with a named company.
Mr and Mrs N complained when they subsequently received
a re-projection letter indicating that the policy would
not produce enough to repay their mortgage.
Our adjudicator’s initial view was that the complaint
would not succeed, as the sale had been an ‘execution-only’
transaction (one involving no financial advice). Mr
and Mrs N rejected that view, as they felt they should
have been offered advice. Unlike his wife, Mr N was
not an employee of the firm and he felt he was owed
a duty of care.
The case was referred to the ombudsman for a final decision.
He did not uphold the complaint. The sale had been properly
conducted on an ‘execution-only’ basis. Mrs
N had sufficient knowledge of investments to understand
the implications of investing on this basis, and there
was no evidence that she had felt any need to seek advice
before proceeding with the deal. She had benefited from
the sale by receiving commission and both she and her
husband had benefited from the discounted mortgage interest
rate.
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14/15
Mr Y is a stockbroker. He took out a loan against the
future value of an endowment policy he had taken out
several years earlier. He agreed to repay it no later
than the date when the policy matured. However, he did
not pay any of the interest on the loan, so by the time
the policy reached maturity, the accrued interest, together
with the capital amount he had borrowed, made up a very
substantial sum. Mr Y claimed that, until the policy
matured, he had been unaware of the amount of interest
he owed.
Mr Y had taken independent financial advice some five
years earlier, resulting in his making increased payments
into a personal pension plan. He alleged that the adviser
should, instead, have advised him to repay the outstanding
loan.
There was no evidence that Mr Y had told the adviser
of the existence of the loan and, from the information
he gave the adviser about his personal circumstances,
the advice Mr Y received appeared to have been entirely
appropriate.
Mr Y confirmed that he had received annual interest
notices, setting out the amount of interest due, and
he admitted that he had misread them. Mr Y enjoyed considerable
earnings and we were satisfied that he had sufficient
disposable income to be able to pay both the outstanding
interest on the loan and the pension contributions.
We did not uphold the complaint.
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14/16
In 1996, Mr R bought a PEP (Personal Equity Plan) through
an independent financial adviser. The sale was made
on an ‘execution-only’ basis as no advice
was given. Mr R subsequently discovered that German-owned.
He complained of misrepresentation because the product
literature did not mention this. He explained that,
for personal reasons, he would not have bought the PEP
if he had known of the German connection.
We did not uphold the complaint. There was no question
of Mr R having been misled about the nature of the investment
and – in the context of its investment contract
with Mr R – there was no onus on the firm to disclose
the nationality of the firm’s owners. If Mr R had
special requirements, it was up to him to make sufficient
enquiries to ensure that the product met his criteria.
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14/17
Mr H was in dispute with the firm concerning his eligibility
to receive a windfall benefit, following the firm’s
merger with another company. To be eligible, customers
had to be ‘members’ of the firm at midnight
on 26 May. Four days before that date, Mr H had asked
for a transfer of his pension benefits from the personal
pension policy he had with the firm. The transfer, and
the termination of the policy, did not take place until
after 26 May. Mr H therefore insisted that the firm
had acted incorrectly in telling him he was not entitled
to receive the windfall benefit. However, the firm said
that Mr H had no longer been a ‘member’ by
26 May.
We rejected the complaint. Membership rights are determined
by statute, which states that membership ceases when
‘the benefit under a policy falls due’. Mr
H had sent the firm a valid, signed request for a transfer
of his policy benefits and we considered that the policy
benefit was ‘due’ on the date the firm received
the request. His membership therefore came to an end
that day. The fact that the transfer was not actually
carried out until after 26 May was irrelevant.
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14/18
Mr J complained that he had been inappropriately advised
to transfer his existing investments into a ‘drawdown’
policy (a policy where the income is drawn from the
investment fund, not from an annuity). He said the advice
he was given had not taken into account the benefits
he would forego by giving up his existing investments.
These benefits included guaranteed annuity rates when
he reached normal retirement age. The amount of money
involved was significant.
The firm accepted that it had not discussed with him
the loss of the guaranteed annuity rates. However, it
suggested that Mr J had such an overriding need for
the cash sum that he would have acted no differently
had such a discussion taken place. It also said that
it had discussed the other potential options with Mr
J but that he had rejected them all, and no other alternative
was available.
We did not uphold Mr J’s complaint. The case turned
on his individual financial circumstances, which were
complex and included significant liabilities and substantial
property assets. We concluded that, in these very specific
and individual circumstances, the firm had recommended
the ‘drawdown’ as a last resort. We saw sufficient
evidence that the firm had made Mr J aware of this,
and of the disadvantages, but that this had been the
only feasible option acceptable to him.
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14/19
Mr G ran a small self-administered pension scheme on
behalf of himself and several employees. One of the
investments within that scheme was a trustee investment
bond. Mr G’s complaint concerned the advice he
received to ‘cash in’ that bond in order to
fund a tax-free cash sum for a member of the scheme
who was retiring.
The majority of the cash that Mr G needed was available
from other sources, so he only required a comparatively
small additional amount. However, Mr G was advised to
cash in the bond in its entirety. Approximately 15%
was used to make up the amount to be paid to the employee
and the rest was placed in the trustee bank account.
The
firm accepted that its advice might not have been suitable
but it found it difficult to quantify a loss or make
an award of redress. When we looked in to the matter,
it became clear that the firm could have offered an
alternative solution that was far more appropriate.
We established that Mr G had suffered a financial loss
and we reached agreement between him and the firm about
a suitable formula for calculating the amount of redress
that was due.
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14/20
Mrs E, an elderly lady, complained that she had been
inappropriately advised to transfer her entire savings
from a building society account into an offshore high-yield
fund, and to take an income from the new investment.
Although the investment generated an income, the amount
of capital depreciated significantly. Mrs E said that
she was not in a position to take any risk with her
investment and had not been warned that the capital
could depreciate.
The firm suggested that Mrs E had been advised of the
risk she was undertaking and there was a note to this
effect on the ‘fact-find’.
We upheld the complaint. Mrs E was not an experienced
investor and had previously taken no risk with her money.
The product literature provided no warnings about possible
capital depreciation. Moreover, the level of income
that the adviser suggested was highly likely to cause
the amount of capital to fall. We also noted that, before
she made this investment, the adviser had told Mrs E
her building society funds were at risk of falling in
value, as a result of inflation.
We decided that the appropriate redress was to place
Mrs E back in the position she had been in before transferring
her funds out of the building society. We therefore
required the firm to close the new investment and to
place back in
Mrs E’s building society account the same amount
that, acting on its advice, she had transferred out.
No account was taken of the higher income Mrs E had
enjoyed from the offshore fund.
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complaints involving tax allowances
The failure of firms to carry out customer’s instructions
in connection with the end of a tax year is a regular
cause for complaint.
It can be extremely difficult to establish the amount
of redress firms should pay when customers lose tax
allowances as a result of a firm’s failure to act
on instructions. Each case needs to be looked at on
its own merits and, once a firm’s liability has
been established, conciliation is often required to
establish an appropriate level of redress and settle
the dispute.
It is worth noting that, for basic rate taxpayers, the
loss of these allowances is not normally as significant
a matter – in cash terms – as they expect.
For higher-rate taxpayers, however, the position can
be very different. In view of the timing of this edition
of ombudsman news, we hope that the following
case studies may be particularly helpful.
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14/21
Mrs L wanted to invest in a stocks and shares ISA (Individual
Savings Account) before the end of the tax year and
she rang the firm in early March 2000 to ask for an
application form. The form that the firm sent her was,
in fact, for a unit trust holding – not for an
ISA.
Mrs L assumed she had received the correct form. She
filled it in and returned it to the firm on 24 March,
with a cheque for £7,000. The application form
had stated clearly that it was for a unit trust holding,
but two sections of the form could have led her to believe
that she had to buy units in the unit trust before the
investment was converted to an ISA.
On 29 March, she received confirmation from the firm
that it had received her application. She believed from
this that she had an ISA for the 1999/2000 tax year.
She was therefore very confused when, towards the end
of April, the firm sent her confirmation that it had
recently received her application for a stocks and shares
ISA for the 2000/2001 tax year.
It appeared that although the firm had invested her
money before the end of the tax year, it had, mistakenly,
put it in a unit trust, not an ISA. When it realised
the mistake, it made arrangements to transfer Mrs L’s
investment in to an ISA for the 2000/2001 tax year.
The
loss of Mrs L’s 1999/2000 ISA allowance put her
at a financial disadvantage and we suggested that the
firm should pay compensation of £700 (10% of the
original amount to be invested), together with a further
£50 for distress and inconvenience. The complaint
was settled on this basis.
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14/22
Mrs H decided to top up her 2000/2001 ISA in order to
bring the amount in the account up to the limit of £7,000.
She therefore arranged to transfer £5,055 into
her ISA from other funds she held with the same firm.
It appears, however, that the firm gave Mrs H incorrect
bank details. This resulted in the transfer not taking
place and in her subsequently missing the deadline for
the tax year.
The firm admitted its fault and offered to pay Mrs H
£150 for the distress and inconvenience caused.
However, it then compounded its error by telling Mrs
H that if she sent in a cheque, it would be added to
the ISA, even though the deadline had passed. The firm
later had to withdraw this offer, as it would have breached
Inland Revenue rules if it had added the additional
funds at that time.
Mrs H said that she had intended to hold the ISA for
5 years and she asked for compensation in the region
of £1,000. This was the amount of tax (at the
higher rate) that she said she would have paid, assuming
a 10% growth rate over that
5-year period.
We were satisfied that Mrs H would have held the ISA
in question for at least 5 years and that she intended
to use her full ISA allowance in each year. We therefore
considered that the firm’s failure to provide the
correct information had resulted in the permanent loss
of £5,055 ISA allowance.
The firm agreed to pay compensation based on the loss
of tax-free income for the year 2000/2001, compounded
over the five-year period, together with payment of
the sum of £150 that they had already offered.
Mrs H agreed to settle on this basis.
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14/23
Mrs D’s complaint concerned the firm’s delay
in processing her application for a stocks and shares
ISA for the following tax year. The firm apologised
and offered to set up a unit trust for her, at the price
she would have obtained if the ISA had gone through.
It also offered to pay her £100 for the distress
and inconvenience it had caused.
Dissatisfied with this, Mrs D referred the complaint
to us. We were able to settle the matter by conciliation.
We pointed out to Mrs D that if her ISA application
had gone ahead, her money would have been invested in
the same unit trust that the firm was now offering to
put her money in. All she would have lost was the tax-free
status provided by the investment’s ISA ‘wrapper’.
She told us that she had planned to keep the ISA for
five years. Since she was a basic-rate taxpayer, it
was exceptionally unlikely that she would have gained
sufficient income from her investments over five years
to become liable for Capital Gains Tax. So the loss
of the tax-free status was, in fact, negligible.
Mrs D decided to go ahead with the unit trust investment
and to accept the sum that the firm offered for distress
and inconvenience.
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