DISP App 2
Handling
Mortgage Endowment Complaints
DISP App 2.1
Introduction
- 01/12/2004
DISP App 2.1.1
See Notes
This appendix sets out the
approach and standards which firms should
use when investigating complaints relating to the sale of endowment policies for the purposes
of achieving capital repayment of a mortgage. It is not intended to be comprehensive.
It is primarily concerned with the assessment of whether the complainant may
have suffered financial loss, and if so, how much that loss is, and therefore
what amount a firm should
consider offering by way of fair and appropriate compensation in circumstances
where the firm's investigation
of a complaint reveals:
(1) the complainant has received negligent advice on investments;
and
(2) if this advice had not been negligent,
either:
(a) the complainant would be unlikely to
have acquired the endowment policy but instead would have taken out the same
amount of loan on a repayment basis; or
(b) the complainant would have acquired an
endowment mortgage for a shorter term.
- 01/04/2002
DISP App 2.1.2
See Notes
There will also be cases where a firm will conclude after
investigation that, notwithstanding its own failure to give compliant and
proper advice, the complainant would nevertheless have proceeded with the
endowment policy as sold, in which case no compensation will be due.
- 01/04/2002
DISP App 2.1.3
See Notes
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DISP App 2.1.4
See Notes
- 01/04/2002
DISP App 2.1.5
See Notes
This appendix is also relevant to complaints
which the Ombudsman may
investigate under the Compulsory
Jurisdiction or Voluntary
Jurisdiction of the Financial
Ombudsman Service established under Part XVI of the Act (The Ombudsman Scheme).
- 01/04/2002
DISP App 2.1.6
See Notes
Before proceeding to assess the extent
of a complainant's financial loss, a firm will
usually have completed the following stages:
(1) gathering all relevant facts and information;
(2) making a fair and objective assessment
whether it has failed to comply with a relevant duty owed to the complainant;
and
(3) assessing whether any failure of duty
by it was in the circumstances a material failure in the sense that if it
had not occurred the complainant would have been likely to have acted differently.
- 01/04/2002
DISP App 2.1.7
See Notes
If it is concluded that the complainant
would have acted differently, the firm should
proceed to assess any direct or consequential loss.
- 01/04/2002
DISP App 2.1.8
See Notes
Nothing in this appendix relieves firms of the obligation
to consider the particular facts and circumstances of each complaint and to
consider whether the assessment of loss and compensation should, in the light
of those facts and circumstances, be carried out on a different basis. If,
however, the facts and circumstances make it appropriate to do so, the FSA's expectation is that firms will apply the approach
and standards set out in this appendix, and where they do not, the FSA is likely to require
them to demonstrate the adequacy and completeness of their alternative approach.
- 01/04/2002
DISP App 2.2
The standard approach to redress
- 01/12/2004
DISP App 2.2.1
See Notes
If there has been a failure to give compliant
and proper advice, or some other breach of the duty of care, the basic objective
of redress is to put the complainant, so far as is possible, in the position
he would have been in if the inappropriate advice had not been given, or the
other breach had not occurred. In many cases, although it must be a matter
for inquiry and assessment in each individual case, this position is likely
to have resulted in the complainant taking a repayment mortgage with accompanying
life cover, and this is the assumption which underpins the standard approach
to redress.
- 01/04/2002
DISP App 2.2.2
See Notes
Unless the contrary is demonstrated,
it should be assumed that the complainant could have afforded the mortgage
on a repayment basis.
- 01/04/2002
DISP App 2.2.3
See Notes
The measure of any financial loss suffered
by the complainant will be arrived at by:
(1) comparing the complainant's current capital
position with the position he would have been in had the loan been a standard
repayment mortgage as at the date the firm decides
to regard the complaint as justified; and
(2) comparing the cost of the complainant's
actual monthly outgoings and those he would have made had his loan been on
a standard repayment basis as at the date the firm decides to regard the complaint as justified.
- 01/04/2002
DISP App 2.2.4
See Notes
In some cases other factors may be included
in the overall calculation, for example, if mortgage arrangement fees were
waived by agreement on the occasion of the endowment policy being taken out.
- 01/04/2002
DISP App 2.2.5
See Notes
If, on comparing the complainant's current
endowment position with the repayment alternative, the surrender value of the endowment policy exceeds the amount
of the capital which the complainant would have repaid through the repayment
method, then, at the point of the assessment, the complainant has suffered
no capital loss (but the complainant may suffer some compensatable consequential
loss associated with changing the mortgage arrangements to the repayment basis,
see DISP App 2.3). Conversely, if the
capital which would have been repaid on the repayment basis exceeds the surrender value, there
is a capital loss represented by the difference between the two amounts.
- 01/04/2002
DISP App 2.2.6
See Notes
If the complainant's endowment mortgage
outgoings exceed the equivalent cost for the repayment method, the complainant
should be compensated for the higher payments in addition to any loss on the surrender value and capital
repaid comparison. This means, for example, that if the endowment arrangement
has been more expensive, this may result in compensatable loss even though
the capital repayment against surrender comparison may be favourable to the
endowment.
- 01/04/2002
DISP App 2.2.7
See Notes
If the total cost of the outgoings for
the endowment calculation is less than that for the repayment calculation,
the "savings" should be brought into account in assessing any overall loss
unless it is unreasonable to do so.
- 01/04/2002
DISP App 2.2.8
See Notes
It is unlikely to be reasonable to bring
"savings" into account in circumstances where, at the time of the sale of
the policy:
(1) the complainant was advised or informed
orally or in writing that he would have lower outgoings than would be the
case under a repayment mortgage, whether or not the difference was quantified;
and
(2) the complainant has dissipated those
"savings" on the strength of this advice or information.
- 01/04/2002
DISP App 2.2.9
See Notes
The circumstances in which it may be
appropriate to take some or all of the "savings" into account are those where,
subject to DISP
App 2.2.7 G,
the complainant is of "sufficient means" so that it is reasonable for a firm to assume that the
"savings" have contributed to those means.
- 01/04/2002
DISP App 2.2.10
See Notes
Where it is otherwise reasonable for
"savings" to be brought into account, determining whether or not a complainant
is of sufficient means and, if so, to what extent the "savings" are to be
brought into account, will have to be based on the facts of each individual
case. It will be appropriate to require the complainant to provide adequate
information to assist the firm in
this task. Matters to be taken into account in this assessment may include:
(1) the length of the remaining mortgage
term;
(2) the complainant's current and prospective
resources;
(3) the amount of the capital shortfall in
proportion to the endowment outgoings balance.
- 01/04/2002
DISP App 2.2.11
See Notes
Firms may adopt streamlined processes
to assist them in individual assessments of "sufficient means", but will have
to satisfy themselves that the complainant's position is nevertheless protected.
Firms will need to ensure that the complainant is given an opportunity to
make an informed choice whether to accept the streamlined process, that the
process itself is transparent, and that the firm is satisfied that the outcome
would be fair to complainants.
- 01/04/2002
DISP App 2.2.12
See Notes
If a firm intends to make a deduction for all
or any part of the lower endowment outgoings, the firm should explain clearly to the complainant
in writing both how the 'sufficient means' test has been satisfied, including
details of the information taken into account in reaching the decision, and
how the deduction has been arrived at. The letter should further inform the
complainant that if he is unhappy with the proposal to make a deduction, either
in principle or as to the amount, he should give his reasons to the firm.
- 01/04/2002
DISP App 2.2.13
See Notes
If a complainant puts forward a case
that it would be unreasonable for a deduction to be made, the firm should reach a fair
and objective determination on the facts of all relevant matters including
those set out at DISP
App 2.2.8 G and DISP
App 2.2.9 G.
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DISP App 2.2.14
See Notes
- 01/04/2002
DISP App 2.2.15
See Notes
It would not be unreasonable if a firm providing redress
in these circumstances were to frame its offer of redress on the assumption
that the complainant will agree to surrender the policy. However, firms should bear in mind that there may
be circumstances where it is appropriate for the complainant to retain the policy, for example, where
it is being retained as a savings vehicle.
- 01/04/2002
DISP App 2.2.16
See Notes
If a complainant becomes aware that he
has taken out the endowment policy on
the basis of unsuitable advice and inadequate information, he should if necessary,
after taking appropriate advice, take reasonable steps to limit his loss,
and may in any subsequent claim be
unable to recover for losses which are avoidable. The complainant may have
to show that he has not delayed unreasonably since becoming aware of his loss.
The reasonable costs and expenses the complainant may have incurred in limiting
his loss are to be taken into account in assessing his compensation. These
costs and expenses are likely to include the complainant taking advice on
whether he should convert from an endowment to a repayment mortgage and incurring
expenses in doing so, see DISP App 2.3.
- 01/04/2002
DISP App 2.2.17
See Notes
The standard approach to redress can
be illustrated by the following examples, which show how redress would be
calculated in certain hypothetical but typical scenarios. (Because the examples
are illustrative, round numbers have been used for 'established facts' in
each example. The payments should be taken as being made monthly: firms should not approximate
by assuming that payments are made annually. If the complainant has benefited
from MIRAS, the calculations should allow for the effect of MIRAS both on
the endowment mortgage and the repayment comparison.)
- 01/04/2002
DISP App 2.2.18
See Notes
Table of examples of typical redress calculations
| Example 1 | Capital shortfall and higher endowment outgoings |
| Example 2 | Capital shortfall partially offset by lower endowment mortgage outgoings |
| Example 3 | Capital shortfall more than offset by lower endowment mortgage outgoings |
| Example 4 | Capital surplus more than offset by higher endowment mortgage outgoings |
| Example 5 | Capital surplus partially offset by higher endowment mortgage outgoings |
| Example 6 | Capital surplus and lower endowment mortgage outgoings |
| Example 7 | Low start endowment mortgage |
- 01/04/2002
DISP App 2.2.19
See Notes
Example 1
| Example 1 | |
| Capital shortfall and higher endowment mortgage outgoings | |
| Background | |
| Capital sum of £50,000 | |
| 25 year endowment policy | |
| Duration to date: 5 years | |
| Endowment premium per month: £75 | |
| Established facts | |
| Endowment surrender value: | £3,200 |
| Capital repaid under equivalent repayment mortgage: | £4,200 |
| Surrender value less capital repaid: | (£1,000) |
| Cost of converting from endowment mortgage to repayment mortgage: | (£200) |
| Total outgoings to date | |
| Equivalent repayment mortgage (capital + interest + DTA life cover): | £21,950 |
| Endowment mortgage (endowment premium + interest): | £22,250 |
| Difference in outgoings (repayment - endowment): | (£300) |
| Basis of compensation | |
| In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid and also because of the higher total outgoings to date of the endowment mortgage relative to the repayment mortgage. The two losses and the conversion cost are therefore added together in order to calculate the redress. | |
| Redress | |
| Loss from surrender value less capital repaid: | (£1,000) |
| Loss from total extra outgoings under endowment mortgage: | (£300) |
| Cost of converting to repayment mortgage: | (£200) |
| Total loss: | (£1,500) |
| Therefore total redress is: | £1,500 |
- 01/04/2002
DISP App 2.2.20
See Notes
Example 2
| Example 2 | |
| Capital shortfall partially offset by lower endowment mortgage outgoings | |
| Background | |
| Capital sum of £50,000 | |
| 25 year endowment policy | |
| Duration to date: 5 years | |
| Endowment premium per month: £60 | |
| Established facts | |
| Endowment surrender value: | £2,500 |
| Capital repaid under equivalent repayment mortgage | £4,200 |
| Surrender value less capital repaid under equivalent repayment mortgage: | (£1,700) |
| Cost of converting from endowment mortgage to repayment mortgage | (£300) |
| Total outgoings to date: | |
| Repayment mortgage (capital + interest + DTA life cover): | £21,950 |
| Endowment mortgage (endowment premium + interest): | £21,350 |
| Difference in outgoings (repayment - endowment): | £600 |
| Basis of Compensation | |
| In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained form the lower outgoings of the endowment mortgage to date. In calculating the redress the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. | |
| Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings | |
| Loss from surrender value less capital repaid: | (£1,700) |
| Gain from total lower outgoings under endowment mortgage: | £600 |
| Cost of converting to repayment mortgage: | (£300) |
| Net loss: | (£1,400) |
| Therefore total redress is: | £1,400 |
| Redress if it is unreasonable to take account of gain from lower outgoings | |
| Loss from surrender value less capital repaid: | (£1,700) |
| Gain from total lower outgoings under endowment mortgage: | Ignored* |
| Cost of converting to repayment mortgage: | (£300) |
| Net loss taken into account: | (£2,000) |
| Therefore total redress is: | £2,000 |
| * In this example, and also in Examples 3, 7, 8 and 9, the complainant's circumstances are assumed to be such as to make it unreasonable to take account of any of the gain from lower outgoings. | |
- 01/04/2002
DISP App 2.2.21
See Notes
Example 3
| Example 3 | ||
| Capital shortfall more than offset by lower endowment mortgage outgoings | ||
| Background | ||
| Capital sum of £50,000 | ||
| 25 year endowment policy | ||
| Duration to date: 8 years | ||
| Endowment premium per month: £65 | ||
| Established facts | ||
| Endowment surrender value: | £7,300 | |
| Capital repaid under equivalent repayment mortgage: | £7,600 | |
| Surrender value less capital repaid: | (£300) | |
| Cost of converting from endowment mortgage to repayment mortgage: | (£200) | |
| Total outgoings to date | ||
| Repayment mortgage (capital + interest + DTA life cover): | £34,510 | |
| Endowment mortgage (endowment premium + interest): | £33,990 | |
| Difference in outgoings (repayment - endowment): | £520 | |
| Basis of Compensation | ||
| In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained from the lower total outgoings of the endowment mortgage. In calculating redress the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. | ||
| Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings | ||
| Loss from surrender value less capital repaid: | (£300) | |
| Gain from total lower outgoings under endowment mortgage: | £520 | |
| Cost of converting to repayment mortgage: | (£200) | |
| Net gain: | £20 | |
| Therefore, there has been no loss and no redress is payable. | ||
| Redress if it is unreasonable to take account of gain from lower outgoings | ||
| Loss from surrender value less capital repaid: | (£300) | |
| Gain from total lower outgoings under endowment mortgage: | Ignored | |
| Cost of converting to repayment mortgage: | (£200) | |
| Net loss taken into account: | (£500) | |
| Therefore total redress is: | £500 | |
- 01/04/2002
DISP App 2.2.22
See Notes
Example 4
| Example 4 | |
| Capital surplus more than offset by higher endowment mortgage outgoings | |
| Background | |
| Capital sum of £50,000 | |
| 25 year endowment policy | |
| Duration to date: 8 years | |
| Endowment premium per month: £75 | |
| Established facts | |
| Endowment surrender value: | £7,800 |
| Capital repaid under equivalent repayment mortgage: | £7,600 |
| Surrender value less capital repaid: | £200 |
| Cost of converting from endowment mortgage to repayment mortgage: | (£250) |
| Total outgoings to date | |
| Repayment mortgage (capital + interest + DTA life cover): | £34,510 |
| Endowment mortgage (endowment premium + interest): | £34,950 |
| Difference in outgoings (repayment - endowment): | (£440) |
| Basis of compensation | |
| In this example, the complainant has suffered loss because of the higher total outgoings to date of the endowment mortgage but has gained because the surrender value of the endowment is greater than the capital repaid. Since the sum of the loss and the conversion cost is greater than the gain, the redress is calculated as the difference between the two. | |
| Redress | |
| Gain from surrender value less capital repaid: | £200 |
| Loss from total extra outgoings under endowment mortgage: | (£440) |
| Cost of converting to repayment mortgage: | (£250) |
| Net loss: | (£490) |
| Therefore total redress is: | £490 |
- 01/04/2002
DISP App 2.2.23
See Notes
Example 5
| Example 5 | |
| Capital surplus partially offset by higher endowment mortgage outgoings | |
| Background | |
| Capital sum of £50,000 | |
| 25 year endowment policy | |
| Duration to date: 10 years | |
| Endowment premium per month: £75 | |
| Established facts | |
| Endowment surrender value: | £11,800 |
| Capital repaid under equivalent repayment mortgage: | £9,700 |
| Surrender value less capital repaid: | £2,100 |
| Cost of converting from endowment mortgage to repayment mortgage: | (£300) |
| Total outgoings to date | |
| Repayment mortgage (capital + interest + DTA life cover): | £46,800 |
| Endowment mortgage (endowment premium + interest): | £47,500 |
| Difference in outgoings (repayment - endowment): | (£700) |
| Basis of compensation | |
| In this example, the complainant has suffered loss because of the higher total outgoings to date of the endowment mortgage relative to the repayment mortgage. However the sum of this and the conversion cost is less than the complainant's gain from the difference between the surrender value of the endowment and the capital repaid. Thus no redress is payable. | |
| Redress | |
| Gain from surrender value less capital repaid: | £2,100 |
| Loss from total extra outgoings under endowment mortgage: | (£700) |
| Cost of converting to repayment mortgage: | (£300) |
| Net gain: | £1,100 |
| Therefore there has been no loss and no redress is payable. | |
- 01/04/2002
DISP App 2.2.24
See Notes
Example 6
| Example 6 | |
| Capital surplus and lower endowment mortgage outgoings | |
| Background | |
| Capital sum of £50,000 | |
| 25 year endowment policy | |
| Duration to date: 10 years | |
| Endowment premium per month: £65 | |
| Established facts | |
| Endowment surrender value: | £10,100 |
| Capital repaid under equivalent repayment mortgage: | £9,700 |
| Surrender value less capital repaid: | £400 |
| Cost of converting from endowment mortgage to repayment mortgage: | (£200) |
| Total outgoings to date | |
| Repayment mortgage (capital + interest + DTA life cover): | £46,800 |
| Endowment mortgage (endowment premium + interest): | £46,300 |
| Difference in outgoings (repayment - endowment): | £500 |
| Basis of compensation | |
| In this example, the complainant has gained both because the surrender value of the endowment is greater than the capital repaid and because of the lower total outgoings of the endowment mortgage. These gains are larger than the cost of converting to a repayment mortgage. Thus no further action is necessary. | |
| Redress | |
| As there has been no loss, no redress is payable. | |
- 01/04/2002
DISP App 2.2.25
See Notes
Example 7
| Example 7 | |
| Low start endowment mortgage | |
| Background | |
| Capital sum of £50,000 | |
| 25 year endowment policy | |
| Duration to date: 10 years | |
| Endowment premium per month: starting at £35 in first year, increasing by 20% simple on each policy anniversary, reaching £70 after five years and then remaining at that level. | |
| Established facts: | |
| Endowment surrender value: | £8,200 |
| Capital repaid under equivalent repayment mortgage:: | £9,700 |
| Surrender value less capital repaid: | (£1,500) |
| Cost of converting from endowment mortgage to repayment mortgage: | (£250) |
| Total outgoings to date | |
| Repayment mortgage (capital + interest + DTA life cover): | £46,800 |
| Endowment mortgage (endowment premium + interest): | £45,640 |
| Difference in outgoings (repayment minus endowment): | £1,160 |
| Of this difference in outgoings, £800 arose in the five year period when the complainant was paying a low endowment premium. | |
| Basis of compensation | |
| In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained from the lower total outgoings of the endowment mortgage. As in Example 3, in calculating redress the whole of the gain should be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to do so. However, unlike Example 3, in a low start endowment mortgage the complainant may have chosen to pay a lower than usual premium in the early years (this would need to be established on the facts of the case). Where it has been established that the complainant chose to make lower payments, even if it is unreasonable to take account of the whole of the gain from total outgoings, the gain from paying a lower premium during the low start period is normally taken into account. In such cases the redress is calculated as the capital loss plus the conversion cost minus the total amount by which repayment mortgage outgoings would have exceeded the actual low start endowment mortgage outgoings during the five year low start period. | |
| Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings | |
| Loss from surrender value less capital repaid: | (£1,500) |
| Gain from total lower outgoings under endowment mortgage: | £1,160 |
| Cost of converting to repayment mortgage: | (£250) |
| Net loss: | (£590) |
| Therefore total redress is: | £590 |
| Redress if it is unreasonable to take account of gain from lower outgoings | |
| Loss from surrender value less capital repaid: | (£1,500) |
| Gain from total lower outgoings during low start period of endowment mortgage: | £800 |
| Cost of converting to repayment mortgage: | (£250) |
| Net loss taken into account: | (£950) |
| Therefore total redress is: | £950 |
- 01/04/2002
Interest rates
DISP App 2.2.26
See Notes
In fixing a repayment comparator, it
would be appropriate to have regard to the repayment quotation actually provided
at the time of sale. If more than one repayment quotation was obtained, the
comparison should be with the quotation which approximates most closely to
the terms of the endowment mortgage actually taken. If a repayment quotation
was not provided, or is not now available, it should be assumed that the interest
rate for the repayment comparison is the same as that of the mortgage endowment
arrangements. Firms will
then need to replicate interest rate changes throughout the lifetime of the
comparator mortgage.
- 01/04/2002
Life cover
DISP App 2.2.27
See Notes
Unless after due inquiry there is clear
evidence that the complainant with a mortgage endowment had no foreseeable
need for life cover at the time the endowment arrangements were concluded,
in the overall comparison between a repayment mortgage and an endowment mortgage
the monthly outgoings under the repayment will include the premium for the
decreasing term assurance that would have been required. This adjustment for
the cost of life cover is only to be made if the firm is undertaking a comparison of monthly
outgoings. It is not appropriate to deduct the cost of life cover from the
capital loss calculation, as this would constitute double counting.
- 01/04/2002
DISP App 2.2.28
See Notes
If a deduction is to be attributed to
the provision of life cover, the appropriate approach is to assume that the
complainant took out the insurance quoted in the alternative repayment quotation
provided at the time of the sale. If the quotation is not available, the deduction
should be at the rates that would have been quoted at the time.
- 01/04/2002
DISP App 2.3
Remortgaging
- 01/12/2004
DISP App 2.3.1
See Notes
As already noted, the basic objective
of redress is to put the complainant, so far as is possible, in the position
he would have been in if the inappropriate advice or other breach had not
occurred: for their part, the complainants should take such reasonable steps
as they can to limit loss once they are informed of the position they are
in because of the failure of advice at the time of sale.
- 01/04/2002
DISP App 2.3.2
See Notes
In practice, it is likely to be appropriate
for a complainant whose complaint has been upheld to convert to a repayment
mortgage, whether or not there is financial loss to date. It will normally
be possible for complainants to do so without incurring unreasonable cost.
Conversion will of course mean that the complainant no longer has a policy.
- 01/04/2002
DISP App 2.3.3
See Notes
Firms should
therefore in the case of upheld complaints inform complainants that it is
likely to be appropriate and necessary for them to convert to a repayment
arrangement.
- 01/04/2002
DISP App 2.3.4
See Notes
Firms should
make it clear that they will bear the costs of conversion if the rearrangement
is made with the existing lender and to the equivalent repayment mortgage.
If a complainant is not willing to rearrange with the existing lender, then
the costs to be paid by the firm should
normally be limited to those which would have been payable had the rearrangement
been made with the existing lender and to the equivalent repayment mortgage.
If it is not possible to rearrange with the existing lender, for example,
if the lender has a closed book, the firm should
pay all costs which are not unreasonable in completing the rearrangement with
an alternative provider. Such costs might include an administration fee for
changing the existing arrangement, redemption penalty, arrangement fee for
the new mortgage and the reasonable cost of further advice if necessary.
- 01/04/2002
DISP App 2.3.5
See Notes
If the "new" mortgage is, in fact, arranged
at a lower interest rate than the existing loan, the benefit to the complainant
should usually be disregarded, as it is always open to complainants to change
their underlying mortgage arrangements at any time.
- 01/04/2002
DISP App 2.3.6
See Notes
If the "new" mortgage is arranged at
a higher interest rate than the existing loan, the increased payment should
not normally be taken into account in calculating any payment to be made to
the complainant.
- 01/04/2002
DISP App 2.3.7
See Notes
If the complainant takes the opportunity
to increase his loan on the occasion of the remortgage, the expenses which
a firm pays
by way of compensation should be paid by reference to the capital sum due
under the "old" loan.
- 01/04/2002
DISP App 2.3.8
See Notes
As stated, one aspect of the conversion
process is the disposal of the endowment policy.
The standard approach to assessing loss requires firms to calculate loss using the surrender value. However,
once loss is established on this basis and firms move to deal with redress, they may
wish to consider whether there is a role for the policy's 'market value' within the traded
endowment policy (TEP)
market.
- 01/04/2002
DISP App 2.3.9
See Notes
A firm may
arrange the sale of the endowment policy on
the traded endowment market, provided the full implications of such a course
of action are explained to the complainant and his express consent is obtained
for the firm to arrange the sale. This includes informing the investor that
he will continue to be the life assured under the policy. The complainant should be informed
that such an arrangement may reduce or eliminate the amount of redress actually
borne by the firm,
but not so as to affect the amount of redress he receives.
- 01/04/2002
DISP App 2.3.10
See Notes
In the event that a complainant is willing
to pursue this option, a firm should
first have assessed the complainant's loss using the approach set out in this
appendix, and the minimum amount the complainant should receive under such
a sale arrangement is the sum representing the position the complainant should
have been in under this appendix together with the reimbursement of remortgaging
costs. In order to ensure the process does not delay the provision of redress,
the firm must
pay this minimum sum immediately the complainant agrees to the sale arrangement.
To the extent that the net amount realised by the sale of the policy on the traded endowment
market exceeds the total redress due to the complainant, this greater sum
is to be paid to the complainant on completion of the sale. If the amount
realised by the sale of the policy on
the traded endowment market is less than the total redress due to the complainant,
the firm will
be responsible for the amount of the shortfall.
- 01/04/2002
DISP App 2.3.11
See Notes
Example of assessment set out at 2.3.10
| The following example illustrates the position: | |||
| Surrender value | £10,000 | TEP value | £16,000 |
| Loss calculated by standard approach | £5,000 | ||
| Remortgaging costs | £300 | ||
| Total | £15,300 | ||
| Complainant receives £16,000 all ultimately funded from the TEP sale. | |||
| Surrender value | £10,000 | TEP value | £13,000 |
| Redress calculated by standard approach | £5,000 | ||
| Remortgaging costs | £300 | ||
| Total | £15,300 | ||
| Complainant receives £15,300, £13,000 ultimately funded from the TEP sale and £2,300 ultimately funded from the firm. | |||
- 01/04/2002
DISP App 2.4
Policy reconstruction
- 01/12/2004
DISP App 2.4.1
See Notes
This section of this appendix is primarily
concerned with circumstances where the term of the mortgage and associated
endowment policy extend
beyond the individual complainant's normal retirement age in circumstances
where the firm regards
a complaint as justified because the arrangement is not affordable in retirement;
and this could have, and should have, been foreseen at the time of the advice.
- 01/04/2002
DISP App 2.4.2
See Notes
Two sets of circumstances are examined
at DISP
App 2.4.3 G to DISP
App 2.4.13 G. Although these are considered in isolation, firms should, as part
of their investigation of all of the factors involved in the complaint, consider
whether either set of circumstances should be considered in conjunction with
those factors examined at DISP App 2.2.
- 01/04/2002
Case 1
DISP App 2.4.3
See Notes
If on enquiry it is found that no proper
assessment of the complainant's post-retirement means had been undertaken
at the time of sale,
but if the likelihood had been that the complainant would have borrowed the
same amount over a shorter term (up to retirement) using an endowment policy as a repayment
vehicle, then an appropriate form of redress would be for the policy to be reconstructed
with a shorter term.
- 01/04/2002
DISP App 2.4.4
See Notes
Redress should in most cases be provided
by meeting the cost of rearranging the policy,
by way of a lump sum payment into the policy in
respect of the higher rate of premium due
from its inception. It may be appropriate in individual cases to take account
of the lower premiums that
the complainant will have paid to date. The guidance in DISP App 2.2,
as to the circumstances in which this will be appropriate, will be relevant
here.
- 01/04/2002
DISP App 2.4.5
See Notes
If the policy extends beyond retirement age and
the complainant is already retired, the policy should
be reconstructed to a maturity date as at the accepted retirement date, with
the policy proceeds
becoming immediately payable. The costs are to be borne by the firm, subject to any lower
outgoings adjustment.
- 01/04/2002
DISP App 2.4.6
See Notes
Firms should
consider whether the reconstruction would have tax implications for complainants
(see DISP
App 2.5.8 G and DISP
App 2.5.9 G).
- 01/04/2002
DISP App 2.4.7
See Notes
- 01/04/2002
DISP App 2.4.8
See Notes
At the time the complainant is advised
of the revised premium,
he should as a matter of good practice be provided with a reprojection based
on the prevailing projection rates,
which will allow him to address any projected shortfall.
- 01/04/2002
DISP App 2.4.9
See Notes
- 01/04/2002
Case 2
DISP App 2.4.10
See Notes
If a loan extending into retirement was
on any basis not affordable, whether or not it is reconstructed to the retirement
date, firms will
need to consider whether, if proper advice had been given, the loan would
have been taken out at all and, if not, consider what arrangements might now
need to be made in order to reduce the amount of the complainant's borrowings.
- 01/04/2002
Mismatched loans and policy terms
DISP App 2.4.11
See Notes
- 01/04/2002
DISP App 2.4.12
See Notes
In these circumstances the guidance given elsewhere
in DISP App 2.4 will apply as appropriate.
- 01/04/2002
Examples
DISP App 2.4.13
See Notes
The following examples illustrate the
approach to redress as described in this section.
- 01/04/2002
DISP App 2.4.14
See Notes
Example 8
| Example 8 | |
| Term extends beyond retirement age and policy reconstruction | |
| Background | |
| 45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12thpolicy anniversary. | |
| It has always been the intention of the complainant to retire at State retirement age 65. | |
| Term from date of sale to retirement is 20 years and the maturity date of the mortgage is 5 years after retirement. | |
| Established facts | |
| Established premium paid by investor on policy of original term (25 years): | £81.20 |
| Premium that would have been payable on policy with term from sale to retirement (20 years): | £111.20 |
| Actual policy value at time complaint assessed: | £12,500 |
| Value of an equivalent 20-year policy at time complaint assessed: | £21,300 |
| Difference in policy values at time complaint assessed: | £8,800 |
| Difference in outgoings (20 year policy - 25 year policy): | £4,320 |
| Basis of compensation | |
| The policy is reconstructed as if it had been set up originally on a term to mature at retirement age, in this example, a term of 20 years. The difference in the current value of the policy actually sold to the complainant and the current value of the reconstructed policy, as if the premium on the reconstructed policy had been paid from outset, is calculated. The complainant has gained from lower outgoings (lower premiums) of the actual endowment policy to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. | |
| Redress generally if it is not unreasonable to take account of the whole of the gain from lower outgoings | |
| Loss from current value of reconstructed policy less current value of actual policy: | (£8,800) |
| Gain from total lower outgoings under actual policy: | £4,320 |
| Net loss: | (£4,480) |
| Therefore total redress is: | £4,480 |
| Redress if it is unreasonable to take account of gain from lower outgoings | |
| Loss from current value of reconstructed policy less current value of actual policy: | (£8,800) |
| Gain from total lower outgoings under actual policy: | Ignored |
| Therefore total redress is: | £8,800 |
| Additional Information | |
| If the policy is capable of reconstruction, the complainant must now fund the higher premiums himself for the remainder of the term of the shortened policy until maturity. In this example the higher premium could be £111.20. However the firm should provide the complainant with a reprojection letter based on the reconstructed policy such that the actual monthly payment required to achieve the target sum could be even higher, say £130. The reprojection letter should set out the range of options facing the complainant to deal with the projected shortfall, if any. | |
- 01/04/2002
DISP App 2.4.15
See Notes
Example 9
| Example 9 | |
| Term extends beyond retirement age: example of failure to explain investment risks | |
| Background | |
| 45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12th anniversary. | |
| It has always been the intention of the complainant to retire at state retirement age 65. | |
| Term from date of sale to retirement is 20 years and the maturity date of the mortgage is five years after retirement. | |
| In addition, an endowment does not meet the complainant's attitude to investment risk and a repayment mortgage would have been taken out if properly advised. | |
| Established facts | |
| Surrender value (on the 25 year policy) at time complaint assessed: | £12,500 |
| Capital repaid under repayment mortgage of term to retirement date (20 years): | £21,000 |
| Surrender value less capital repaid: | (£8,500) |
| Difference in outgoings (repayment - endowment): | £5,400 |
| Cost of converting from endowment mortgage to repayment mortgage: | £200 |
| Basis of compensation: | |
| The surrender value of the (25 year term) endowment policy is compared to the capital that would have been repaid to date under a repayment mortgage arranged to repay the loan at retirement age, in this example, a repayment mortgage for a term of 20 years. The complainant has gained from lower outgoings of the endowment mortgage to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. The conversion costs are also taken into account in calculating the redress. | |
| Redress generally | |
| Loss from surrender value less capital repaid: | (£8,500) |
| Gain from total lower outgoings under endowment mortgage: | £5,400 |
| Cost of converting to a repayment mortgage: | (£200) |
| Net loss: | (£3,300) |
| Therefore total redress is: | £3,300 |
| Redress if it is unreasonable to take account of gain from lower outgoings | |
| Loss from surrender value less capital repaid: | (£8,500) |
| Gain from total lower outgoings under endowment mortgage: | Ignored |
| Cost of converting to a repayment mortgage: | (£8,700) |
| Therefore total redress is: | £8,700 |
- 01/04/2002
DISP App 2.5
Additional considerations
- 01/12/2004
Introduction
DISP App 2.5.1
See Notes
This section addresses issues which may
be relevant to the standard redress for unsuitability cases, as well as some
post-retirement cases upheld on the grounds of affordability.
- 01/04/2002
Continuing life cover and other policy benefits
DISP App 2.5.2
See Notes
Firms will
need to consider the importance for many complainants of having life assurance
in place to ensure a mortgage is paid off in the event of death.
- 01/04/2002
DISP App 2.5.3
See Notes
If a complaint is upheld and the policy is to be surrendered
as part of the settlement, the firm should
remind the complainant in writing that the life cover within the endowment
will be terminated and that it may therefore be appropriate to take advice
about the merits or otherwise of taking out a stand-alone life policy in substitution.
- 01/04/2002
DISP App 2.5.4
See Notes
If a need for life assurance at inception
has been established so that a deduction representing its cost has been made
from the redress payable under DISP
App 2.2.4 G,
the firm should
advise the complainant that the firm would
be responsible for paying any premium for
an appropriate replacement policy which
exceeds that used for calculating the deduction or alternatively will, where
possible, provide the cover itself at that cost. If it is not possible for
the firm to
provide the cover itself at the original cost, it may choose to discharge
that obligation by the payment of an appropriate lump sum. Any such amount
should enable the complainant to effect the cover at the original cost, with
no additional cost in respect of increased age or deterioration in health.
This option may be particularly relevant if the firm against which the complaint has been
made is an independent intermediary which cannot itself provide the cover,
although it may be possible for such a firm to
arrange for the product provider to offer cover to the complainant at the
original premium on
payment by the independent intermediary of an appropriate lump sum to meet
any increased cost.
- 01/04/2002
DISP App 2.5.5
See Notes
Firms will
not be responsible for any increased costs resulting from the complainant
choosing another product
provider or for increased premiums charged
by another provider chosen by the complainant in respect of the risk now presented,
for example, higher premiums charged
by the other provider due to deterioration in health, unless the original product provider no longer
writes new business and is unable to offer revised life cover on a decreasing
term assurance basis.
- 01/04/2002
DISP App 2.5.6
See Notes
- 01/04/2002
DISP App 2.5.7
See Notes
- 01/04/2002
Taxation
DISP App 2.5.8
See Notes
If, as a result of policies being surrendered or reconstructed,
or if any form of underpinning or guarantee is given, there is a potential
tax liability for the complainant, it will be appropriate for firms to undertake in
writing to the complainant to reimburse any tax payable, or which becomes
payable. Firms should
make this payment on production of appropriate evidence of the liability and
payment having been made.
- 01/04/2002
"Underpinning"
DISP App 2.5.10
See Notes
Firms proposing
to offer arrangements involving some form of minimum underpinning or 'guarantee'
should discuss their proposals with the FSA and the Inland Revenue at the earliest possible
opportunity (see DISP
App 2.5.8 G).
The FSA will
need to be satisfied that these proposals provide complainants with redress
which is at least commensurate with the standard approaches contained in this
appendix.
- 01/04/2002
Reference to the guidance in firms' complaints settlement letters
DISP App 2.5.11
See Notes
One of the reasons for introducing the guidance in this appendix
is to seek a reduction in the number of complaints which are referred to the Financial Ombudsman Service.
If a firm writes
to the complainant proposing terms for settlement which are in accordance
with this appendix, the letter may include a statement that the calculation
of loss and redress accords with the FSAguidance, but should not
imply that this extends to the assessment of whether or not the complaint
should be upheld. Firms should
point out that if the complainant remains dissatisfied, he may refer the complaint
to the Financial Ombudsman
Service.
- 01/04/2002
DISP App 2.5.12
See Notes
A statement under DISP
App 2.5.11 G should not give the impression that the
proposed terms of settlement have been expressly endorsed by either the FSA or the Financial Ombudsman Service.
- 01/04/2002
Identification of windfall benefits
DISP App 2.5.13
See Notes
Windfall benefits should be determined
in accordance with the principle in Needler Financial Services and Taber ('Needler').
The basic legal principle in Needler is that a windfall benefit is not to
be taken into account in determining the amount of an investor's recoverable
loss. The following paragraphs explain our views as to how firms may act in accordance with that principle.
- 01/04/2002
DISP App 2.5.14
See Notes
A windfall benefit arises where:
(1) there has been a demutualisation, distribution
or reattribution of the inherited estate, or other extraordinary corporate
event in a long-term insurer;
and
(2) the event gave rise to 'relevant benefits',
as defined in DISP
App 2.5.15 G (below).
- 01/04/2002
DISP App 2.5.15
See Notes
'Relevant benefits' are those benefits
that fall outside what is required in order that policyholders' reasonable expectations at
that point of sale can be fulfilled. (The phrase 'policyholders' reasonable expectations' has
technically been superseded. However, the concept now resides within the obligations
imposed upon firms by
FSA Principle 6
('...a firm must pay due regard to the interests of its customers and treat them fairly....') Additionally,
most of these benefits would have been paid prior to commencement, when policyholders' reasonable expectations would
have been a consideration for a long-term
insurer.)
- 01/04/2002
DISP App 2.5.16
See Notes
The issue of free shares or cash on a demutualisation, and
additional bonuses and policy enhancements
given by way of incentive to approve a reattribution or distribution of an
inherited estate should, unless there is evidence to the contrary, be treated
as relevant benefits for the purposes of DISP
App 2.5.15 G.
Whether additional bonuses and policy enhancements
on a demutualisation are relevant benefits should be determined by applying
the test in DISP
App 2.5.15 G to
each benefit.
- 01/04/2002
DISP App 2.5.17
See Notes
Firms
should review the terms on which proposals were put to policyholders and the reasons given for a
corporate event when determining whether a benefit should be treated as a
relevant benefit.
- 01/04/2002
DISP App 2.5.18
See Notes
Firms
should not normally bring windfall benefits which are relevant benefits (as
defined in DISP
App 2.5.14 G)
to account when assessing financial loss and redress. Where a windfall benefit
is in the form of a policy augmentation
the benefit should be deducted from the overall value of the policy when making this
assessment.
- 01/04/2002
DISP App 2.5.19
See Notes
A relevant benefit derived from a corporate
event may only be brought to account if the firm is able to demonstrate, with written
records created at the time of the advice, that:
(1) The firm foresaw
the prospect of the event and the benefit;
(2) The firm's
advice included a statement recommending the particular policy because of
the possibility of the benefit in question; and
(3) The statement was a material factor in
the context of the advice and the decision to invest.
- 01/04/2002
DISP App 2.5.20
See Notes
If a firm considers that it can meet this requirement,
the firm should
by letter explain clearly to the complainant the reasons why it proposes that
the benefit should not be treated as a windfall and should be taken into account.
The firm should
provide the complainant with copies of the relevant documents.
- 01/04/2002
DISP App 2.5.21
See Notes
The letter should also explain how the
proposed value of the benefit has been calculated and should inform the complainant
that if he does not accept the proposal to take the benefit into account he
may tell the firm,
with reasons. The letter should also say that, if he remains dissatisfied
with the firm's response,
he may refer the matter to the Financial
Ombudsman Service.
- 01/04/2002
DISP App 2.6
Valuing Relevant Benefits
- 01/12/2004
DISP App 2.6.1
See Notes
If, exceptionally under the guidance at DISP
App 2.5.13 G to DISP
App 2.5.21 G,
cash or shares derived
from a corporate event are to be taken into account when assessing loss and
redress, cash should be valued at the amount actually received and shares should be valued
at their issue price. In both cases there should be no addition for interest.
- 01/04/2002
DISP App 2.6.2
See Notes
When valuing windfall augmentation benefits
for the purposes of calculating loss and redress the objective is to exclude
all changes arising from the windfall event. The amount of redress payable
will then be equal to the amount that would have been payable if the windfall
event had never occurred.
- 01/04/2002
DISP App 2.6.3
See Notes
A product
provider should ensure that the method it adopts for valuing
augmentation benefits is consistent with the statements made in the documentation
published about the windfall event. Relevant documentation for the purpose
of valuing such benefits will include (but is not limited to)-:
(1) Any description of increases in benefits
in any circular to policyholders (and
any other public information relating to the event);
(2) Any principles of financial management
established for the management of the fund after the event;
(3) statements in any appointed actuary report produced for the
event;
(4) statements in any independent actuary report produced
for the event; and
(5) subsequent statements relating to bonus
practice, calculation surrender
values, or both.
- 01/04/2002
DISP App 2.6.4
See Notes
The method of valuation adopted should
treat the complainant fairly overall.
- 01/04/2002
DISP App 2.6.5
See Notes
Where an accurate calculation of the
value of an augmentation benefit either cannot be made, or would result in
disproportionate expense or delay, product
providers may adopt a simplified approach or a proxy method
for calculating its value.
- 01/04/2002
DISP App 2.6.6
See Notes
A simplified approach should treat the
complainants fairly overall.
- 01/04/2002
DISP App 2.6.7
See Notes
The product
provider's appointed
actuary should certify
that the method adopted by the product
provider for calculating the value of an augmentation benefit
is in accordance with the guidance in DISP
App 2.6.1 G to DISP
2.6.6 G.
- 01/04/2002
Implementation
DISP App 2.6.8
See Notes
The principles set out above (in DISP
App 2.6.1 G to DISP
App 2.6.7 G) should be applied directly to mortgage
endowment complaints where the capital loss is calculated by comparing the surrender value of the
endowment policy with
the capital which would have been repaid using a repayment mortgage.
- 01/04/2002
DISP App 2.6.9
See Notes
In most cases where there is a loss,
the endowment policy will
be surrendered and put towards the cost of setting up a suitable repayment
mortgage. Where this is the case, that part of the surrender value relating to the windfall
augmentation should be paid as a cash lump sum to the investor or to the investor's
order as part of the redress package. Only that part of the surrender value which does not relate to
the windfall augmentation should be put towards the cost of setting up a suitable
repayment mortgage.
- 01/04/2002
DISP App 2.6.10
See Notes
There may be some circumstances in which
the policy will
not be surrendered (see DISP
App 2.2.15 G).
In these cases, there is no requirement to pay the value of the windfall augmentation
as a cash lump sum since the value of the augmentation will become payable
when the policy matures.
However, any fund value used in the calculation of redress payable should
exclude the value of the windfall augmentation.
- 01/04/2002
DISP App 2.6.11
See Notes
Firms are
entitled to mitigate losses by making use of the Traded Endowment Policy (TEP)
market (see DISP
App 2.3.8 G to DISP
App 2.3.10 G). This allows firms to sell policies on the
TEP market to meet the costs of redress, rather than using the surrender value. Where
this method is adopted, firms should
pay to the investor, as part of the redress package, a cash lump sum representing
that proportion of the policy realised
which would have related to the windfall augmentation.
- 01/04/2002
DISP App 2.6.12
See Notes
As this windfall amount should be excluded
from the fund value used in the calculation of loss and redress it would also
be appropriate for this extra payment to be ignored when assessing whether,
"the net amount realised by the sale of the policy on the traded endowment market exceeds
the total redress due to the complainant..." (DISP
App 2.3.10 G).
- 01/04/2002
DISP App 2.6.13
See Notes
There may be circumstances in which a policy needs to be reconstructed
(see DISP 2.4). In carrying out the required reconstruction,
the windfall augmentation should be ignored in both the existing and the revised policy. However, the policyholder's revised policy should be credited
with any windfall augmentation which would have applied if the policy had been set up
with the revised terms from the original date of advice. This enhancement
can be taken into account in assessing a suitable level for future premiums,
in line with DISP
App 2.4.8 G.
- 01/04/2002
DISP App 2.6.14
See Notes
DISP
App 2.5.10 G provides firms with the opinion
of underpinning benefits. Firms should
satisfy the FSA that
their proposals provide complainants with a level of redress that is at least
commensurate with the standard approaches and, to ensure consistency, windfall
augmentations should be excluded when considering whether an underpin will
apply. The FSA will
take this into account when considering proposals put forward by firms.
- 01/04/2002
DISP App 2.6.15
See Notes
Product
providers with windfall benefits in the form of policy augmentations should
tell:
(1) their own relevant customers (mortgage endowment complainants);
and
(2) independent financial advisers with such customers (and any other interested parties);
that they have
excluded windfall augmentation benefits from values used or to be used for
loss and redress. Firmsshould provide this information to the Financial Services Compensation Scheme when
providing them with a value to be used for loss or redress. Should their own
relevant customers, independent
financial advisers with such customers (and any other interested parties)
and the Financial Services
Compensation Scheme request it, the firm should provide the value of these benefits
and a description of the method used to exclude them.- 01/04/2002