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mortgage endowments - complaints about post-"A Day" sales

This technical note is a companion to mortgage endowments - complaints about pre-"A Day" sales. It aims to give an overview of the ombudsman's approach to handling post-"A Day" mortgage endowment complaints. There is nothing new in the approach set out here - the principles discussed became well-established many years ago.

This note is based on the ombudsman's experience of handling post-"A Day" complaints. 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. While this note aims to outline our typical approach in any particular case, we may depart from it if the circumstances of the case mean that fairness requires us to do so.

A post-"A Day" sale is one that took place after 29 April 1988 - the day the provision of investment advice became regulated under the Financial Services Act 1986.

regulatory requirements

The Financial Services Act 1986 set up a system of "self-regulation". There were a number of regulators between April 1988 and December 2001 (when the regulatory framework changed) - most notably (for the purposes of mortgage endowment complaints):

  • FIMBRA: the Financial Intermediaries, Managers and Brokers Regulatory Association, which regulated independent financial advisers from April 1988 to July 1994.
  • LAUTRO: the Life Assurance and Unit Trust Regulatory Organisation, which regulated the conduct of business of insurance companies, friendly societies and unit trust companies from April 1988 to July 1994.
  • PIA: the Personal Investment Authority, the regulator for the retail investments sector from July 1994 to December 2001.

Each regulator had its own rules that member firms had to comply with. But in general terms, since "A Day" firms have had to:

  • obtain sufficient personal and financial information, relevant to the service to be performed for the customer, in order to "know the customer"; and
  • give recommendations (based on that information) that are suitable to the customer's circumstances.

When deciding whether or not a recommendation was suitable for a particular customer, we consider the regulatory requirements which applied to the firm at the time of the sale.

The legal principles that apply to pre-"A Day" cases apply equally to post-"A Day" cases - firms giving advice must exercise reasonable care and skill. But as the regulatory framework imposes duties that are at least as demanding, we generally refer only to the regulatory requirements when considering whether a firm met the required standard.

post-"A Day" mortgage endowment complaints

guarantee and misrepresentation

Please see our technical note, mortgage endowments - complaints about pre-"A Day" sales.

suitability

There may have been something about the customers' circumstances, or the policy, that meant the firm should not have recommended the policy to those customers - irrespective of the customers' understanding of the risks involved. (For example, if it is clear that customers required flexibility inconsistent with a long-term commitment, or if affordability over the full term was likely to be an issue.)

But in the vast majority of cases, the underlying issue when considering whether or not a policy is "suitable", is whether or not the policy exposed the customers to a risk (or level of risk) that they were unwilling, or unable, to take with the repayment of their mortgage.

With a mortgage endowment policy there is a risk - the extent of which depends upon the type of policy - that the policy will not grow sufficiently to repay the mortgage at the end of the term. Most customers say they were not aware of this and would not have chosen this type of mortgage (in preference to a repayment mortgage) if they had been told of the risk.

Some customers say they knew there was some risk but were not aware of the level of risk associated with the particular policy they took out - or that the risk was so downplayed by the adviser that they believed it to be less than it was.

We would be unlikely to uphold a complaint if we were satisfied that the customers were willing, and in a position, to take the level of risk presented by the policy sold. But we would probably uphold a complaint if we were satisfied that the customers were not willing to take a risk - whether or not they were in a position to do so.

how do we determine whether customers were willing to take a risk?

One of the main differences with post-"A Day" (as opposed to pre-"A Day") cases is that there is likely to be more documentary evidence available from the time of the sale.

We use this documentary evidence - together with knowledge obtained about the customers' circumstances at the time - to form a view of:

  • what happened at the time of the sale
  • what was likely to have been discussed; and
  • what the customers' appetite for investment risk was likely to have been.

Some firms uphold post-"A Day" complaints simply because they no longer have documents from the time of the sale to demonstrate that the policy was a suitable recommendation. We do not take that approach. The fact that a firm can no longer produce its point-of-sale paperwork, or that something is missing from that paperwork, does not necessarily mean that the recommendation was not suitable. In cases where there is no (or limited) information, we consider all the circumstances - to reach a view of how likely or not it is that these particular customers knowingly accepted the risks inherent in the policy sold.

In this respect we apply much the same approach as we do in pre-"A Day" cases. Please see our technical note, mortgage endowments - complaints about pre-"A Day" sales, for some of the factors we may consider when assessing customers' circumstances and their likely attitude to risk.

We consider all the circumstances in order to form an overall view. As we are making a subjective judgement on individual cases, it is perfectly possible for two complaints with seemingly similar circumstances to have different outcomes - depending on whether or not we believe that the individual customers were aware of the risk.

weighing up the evidence

With post-"A Day" complaints, there may be a "factfind", illustration, brochure or key features document - and (after 1995) a "reasons why" letter. Where these are available, we consider them carefully, along with the customers' circumstances, to help us decide whether the policy was suitable.

contemporaneous evidence in post-"A-day" sales

Firms sometimes ask us what weight we give to contemporaneous evidence from the time of sale - and why, in some cases, we do not find this evidence particularly persuasive.

"attitude to risk" (ATR) scales

Some "factfinds" contain "attitude to risk" (ATR) questions which can be a helpful indication of what the customers' appetite for risk might have been. We take this evidence into account when weighing up the overall position.

However, ultimately we make a decision on what is fair and reasonable in the circumstances. So we must decide what the customers' actual understanding of - and attitude to risk was and whether the recorded ATR is a true reflection of that at the point-of-sale.

The customers' general circumstances are usually a good indication of their likely ATR. So where we see a mismatch between circumstances and recorded ATR, we question whether we should take the recorded ATR at face value.

If the customers' circumstances indicate that it is unlikely they would have taken a risk, the point-of-sale documentation would need to be clear and unambiguous to persuade us that they knowingly accepted the risk despite their circumstances.

Most ATR scales consist of words such as "low", "medium" and "high"; or "cautious", "balanced" and "adventurous"; or a numerical scale - with the lowest number usually representing the lowest degree of risk. This type of "explanation" of risk means very little in itself and, in the absence of any other information, a simple "tick box" recording of ATR is unlikely to be decisive.

But we do not disregard such evidence out of hand. In such cases we probe the customers' understanding at the time, what the adviser told them, and how the risk scale was explained. We also take into account any training or sales scripts that firms may send us - and any evidence from the adviser concerned - in order to reach a view on what is most likely to have happened at the time.

illustrations

With post-"A Day" sales, there is often an illustration showing the projected values of the policy on maturity - using the growth rates specified by the regulator at the time and the growth rate required for the policy to meet its target amount. Usually the target growth rate will fall between the upper and lower growth rates specified by the regulator, so the illustration will show a shortfall at the lower growth rate.

Often firms will point to illustrations as evidence that the customers were aware of the possibility of a shortfall and that (as they took out the policy regardless) they must have been prepared to accept a risk. Whether or not we agree with this argument is likely to depend upon the customers' circumstances generally, the type of policy, other information provided at the time, and how clear the illustration was.

An illustration showing a shortfall as a possibility may indicate some risk - but not necessarily the extent of that risk (if, for example, the policy is a unit-linked investment). And financially unaware customers may not have realised that a shortfall on their policy was a possibility, if the adviser told them the policy would reach at least its target amount.

On the other hand, an illustration provided at the same time as the sales meeting - particularly if signed by the customers - may indicate that it formed part of the sales process and that its contents were discussed at the time.

As with ATR scales, the illustration is likely to be one of the factors we take into account - but it is unlikely to be the sole determining factor.

product brochures and "key features" documents

Post-"A Day" brochures are more likely to contain risk warnings and a clear explanation of the mechanics of the policy than pre-"A Day" brochures. If we are satisfied that the customers received a copy of the brochure/key features document, we will take the contents into account when determining the customers' likely understanding of the risk involved.

We will usually ask the customers what they understood from the brochure - and how this was presented and explained to them at the time. However, we do not assume - because customers received a brochure explaining risk - that this necessarily means they must have knowingly accepted that risk.

We bear in mind that the brochure is likely to have been of secondary importance in the sales process to what was actually said by the adviser. So it does not necessarily follow that the customers will have identified the risk for themselves (from the brochure), if the adviser did not mention it.

letters to the customer - explaining why the product was suitable

For later sales, there might be a letter from the firm to the customer which explains why the recommendation was suitable for the customers (a "reason why" or "suitability" letter).

These letters often provide a valuable insight into the thinking behind the recommendation and the quality of the advice. The better letters contain customer-specific information, showing that risk was discussed and consideration was given to how the customers would cope with a shortfall if necessary (for example, by relying on the probability of a rising income and on there being sufficient time between the end of the term and the customers' retirement).

Sometimes, however, the reasons given for recommending the policy are ambiguous. For example, if the adviser records that the reason for the recommendation was "flexibility", or because "the customer wanted it", we would take into account the possibility that a repayment mortgage may have been equally flexible - or that the customer may only have "wanted" the policy after hearing the adviser's sales pitch.

Similarly, "reason for recommendation" sections of "factfinds" are more likely to be persuasive when the reason is tailored to the circumstances of the particular customers. We see many "factfinds" and are familiar with standard scripts. The use of a standard script does not necessarily mean that the adviser did not discuss its meaning with the customers. It may suggest that the adviser simply copied the script with little thought to how it applied to the needs of the particular customer. So it may be less convincing, when we weigh all the evidence.

unit-linked policies

Most pre-"A Day" complaints are about with-profits policies. Many post-"A Day" complaints are about unit-linked policies. Sometimes the premiums are invested in a managed fund, or sometimes in a specified equity fund (or number of funds) - the amount payable at maturity depending the total value of the units purchased during the policy's term.

The way in which a unit-linked policy (in contrast to a with-profits policy) works increases the risk, and the customers are exposed to the volatility of the underlying investment fund.

We assess complaints about unit-linked policies in the same way we do with-profits policies. But since the risk is greater, the customers' circumstances would need to reflect a likely willingness to take this greater risk. Again, the less likely it is that the customers, in their particular circumstances, would knowingly have taken this degree of risk, the clearer and more persuasive the point-of-sale evidence would need to be - to persuade us that the customers understood and knowingly accepted the level of risk the policy presented.

"execution-only" sales

With the introduction of regulation, provision was made for those sales where customers required specific investments and chose not to receive advice. This enabled advisers to continue to arrange investments for professional investors and others who did not want to go through the complete advice/sales process.

To transact such an "execution-only" sale, a firm will usually obtain a statement signed by the customers to say:

  • they are aware the sale has been carried out on an "execution-only" basis
  • they have not asked for or received advice; and
  • the decision to take out the investment is theirs alone.

We do not lightly dismiss execution-only statements, if the terms are clear. However, we do consider the possibility that execution-only provisions may have been misused in order to avoid regulatory requirements - or may have been used in inappropriate circumstances. A typical complaint might be that the adviser simply asked the customers to sign the form as part of the sales process, without explaining the implications of signing.

Our approach is that we do not automatically accept an execution-only statement at face value. In keeping with our approach to other evidence, we consider the statement in the light of the customers' overall circumstances.

If the customers appear to have been experienced investors - perhaps working in the investment industry at the time of the sale - we are likely to conclude that the execution-only sale was an appropriate course.

If the customers do not appear to have had any particular or unusual knowledge of investment, we will investigate further - usually by asking both the customers and the adviser why the execution-only course was considered appropriate. We will then decide, on the balance of the evidence, whether this was a "true" execution-only sale - or whether, in reality, the firm gave advice.

complaints about performance

Sometimes customers couch their complaints in terms relating to the poor performance of the policy. Or firms may say that the complaint is "performance-led" and would not have been made if the policy had performed well.

We do not place too much emphasis on the precise terms used to bring a complaint.  We look at the underlying problem the consumers are concerned about. We do not expect consumers with complaints to have professional representation. So we do not expect them to be aware of the terminology used by the industry (and us) or of the possible arguments that could be made.

Inevitably, complaints are often linked to performance. It is understandable that customers do not complain if their policy is performing as expected. But that does not necessarily mean the complaint is about performance alone. The underlying complaint is usually about risk - poor performance has simply brought the problem to light.

If we are satisfied that consumers were aware of, and accepted, the risk at the outset - but are now disappointed with the policy's performance - we are unlikely to uphold their complaint. But if we consider the underlying complaint is about risk - and poor performance has simply alerted the consumer to the risk - we will investigate in the usual way.