This note aims to help firms understand the typical approach of the Financial Ombudsman Service to mortgage endowment redress calculations.
We are required to decide our approach in each case on the basis of our existing powers and what is fair in the circumstances of the particular case. We take into account industry guidance and rules, the law and good industry practice. In any particular case we may depart from our typical approach if the circumstances of the case mean that fairness requires us to do so.
In a standard case, if we uphold the complaint, we will tell the firm to pay compensation to put the consumer in the position he or she would have been in, if they had taken out a repayment mortgage at the outset.
The financial services regulator has published a standard approach to calculating the consumer's loss in its guidance, Handling Mortgage Endowment Complaints. We would normally expect firms to calculate redress in accordance with this guidance.
Complications in mortgage endowment redress calculations are usually associated with changes that a consumer has made to his or her mortgage arrangements - for example, where the consumer has converted or redeemed their mortgage.
The regulator's guidance remains the starting point in these cases. But adjustments are often required to take account of the consumer's particular circumstances. Included are eight case studies that illustrate, in broad terms, how we tend to approach the calculation of redress in these more complicated mortgage endowment cases.
We understand that, for commercial and practical reasons, firms may wish to take a more generous approach in some cases (for example, where our approach requires a historic surrender value which the firm finds difficult to obtain). It is unlikely that we would consider this unfair.
Often the loss calculation shows that a repayment mortgage would have been more expensive over the term to date and so the consumer has made notional past savings as a result of having made lower payments to an endowment mortgage.
Usually we would not expect the firm to deduct the notional past savings from the compensation payable. It is possible that we may agree in a particular case that notional savings should be deducted if the "sufficient means test" - as set out in the regulator's guidance at DISP App 1.2 - is satisfied. In order to justify taking notional savings into account, we would normally expect the firm to show that the past savings are still retained by the consumer as identifiable and realisable assets.
Usually we would not expect the firm to deduct the notional past savings from the compensation payable.
Occasionally we might allow the firm to take notional past savings into account when there is sufficient evidence to satisfy us:
The regulator at the time, the Financial Services authority (FSA), gave some guidance on this issue in its December 2004 letter to chief executives [opens in PDF format]
Usually in cases where the policy remains linked to a mortgage, we ask the firm to pay compensation calculated to the date of decision or earlier resolution.
Occasionally we will agree that the firm should calculate the consumer's recoverable losses to an earlier date, often six months after the consumer received a red letter - a letter warning of a high risk that the policy will fail to reach the target amount - when the consumer ought reasonably to have realised that he or she had cause for complaint. This might happen in cases where:
In cases where the policy is no longer linked to a mortgage, and has been retained as a savings policy, we may agree that it is acceptable for the firm to cap the loss to a date (the calculation date) six months after the consumer became sufficiently aware of the risk of an endowment mortgage that it was reasonable to assume he or she should have taken action.
This will normally be six months after a red letter, although, in some cases, there may be sufficient evidence available to set an earlier calculation date.
In other cases - for example, where the consumer complained immediately - we might consider a later calculation date because consumers often keep the policy whilst complaining. In cases where the consumer removed the link between the policy and the mortgage after receiving a red letter, we will ordinarily ask the firm to set the loss calculation to the date that the policy ceased to be used in connection with the mortgage.
Usually in cases where the policy remains linked to a mortgage, we will ask the firm to pay compensation calculated to the date of decision. If at the conclusion of the complaint:
the firm should reimburse the consumer for those charges.
The maximum ERC that we would expect firms to pay is the charge associated with the payment needed to reduce the consumer's mortgage balance to the amount that it would have been, if he or she had taken out a repayment mortgage at the outset.
In some cases, the endowment/repayment comparison may show that the consumer has not suffered a loss (or is actually better off) because he or she took out an endowment mortgage.
If that is the case, the consumer may still be entitled to be compensated, if he or she incurs conversion costs - but only if, and to the extent that, the conversion costs exceed any gain identified by the endowment/repayment comparison. That is, if the gain is lower than the conversion costs, we would normally expect the firm to pay the difference, so the consumer may now switch to a repayment mortgage without being out of pocket.
In some cases, the consumer may already have changed his or her mortgage arrangements and incurred conversion costs.
Usually we would expect the firm to reimburse those costs, ordinarily with interest.
In addition, we would expect the firm to pay any fees that the consumer may incur if he or she now uses the compensation relating to a capital loss (excluding any interest added) to reduce his or her mortgage balance.
If the consumer has already switched to a repayment mortgage, but has retained the policy after he or she became sufficiently aware of the risk of the endowment that they should have taken action, we would:
Mrs M received a red letter in March 2003. Having considered the information contained in the letter, she decided it would be best to surrender her policy and to convert her mortgage to a repayment basis. She used the surrender proceeds of her policy to reduce the outstanding balance of her mortgage (in April 2003).
Mrs M's mortgage lender charged her a £50 fee to switch the mortgage onto a repayment basis. In addition, Mrs M was required to pay a £500 early repayment charge under the terms of her mortgage contract.
Later when Mrs M complained, the firm calculated her loss in accordance with the regulator's guidance, Handling Mortgage Endowment Complaints. The calculation showed that whilst Mrs M had made a small amount of notional past savings, she had incurred a £5,000 capital loss at the point when she converted her mortgage - and the firm offered to pay Mrs M £5,000 plus interest on that amount.
If Mrs M now uses the £5,000 compensation to reduce the balance of her mortgage, she will incur a further £250 early repayment charge.
In this case, in addition to the £5,000 compensation and interest on that amount, we would expect the firm to:
We would not expect the firm to reimburse Mrs M if she uses the interest added to the £5,000 to reduce her mortgage.
Usually in cases where the policy remains linked to a mortgage, and the consumer now wishes to surrender the policy, we would expect the firm to provide the consumer with replacement life insurance on the same terms that would have been available to him or her at the outset.
If the firm is unable to provide replacement life cover (because it does not offer life cover as part of its service) and the cost of life cover is now more expensive than would have been the case at the outset, then the firm should compensate the consumer by offering an extra amount to offset the difference.
If the consumer has already surrendered the policy and taken out DTA at a higher cost than he or she could have obtained at the outset, then, again, we would normally expect the firm to compensate the consumer by offering an extra amount to offset the difference.
If the consumer has already surrendered the policy, but did not take out DTA at that time, then it is unlikely that we would expect the firm to provide replacement DTA now, unless:
In cases where the consumer has switched to a repayment mortgage, but retained the policy after becoming aware of the risks, it is unlikely that we would expect the firm to offer replacement life cover - even if the consumer were to surrender the policy now. The consumer retained the policy and the benefit of life cover when he or she did not have to.
We may take a different approach if: