Act now on mis-sold endowments: new article

Jonny7

I'm not sure if I am sending this to the right place but I would like to ask a couple of technical questions to any IFAs or someone who really understands with-profit endowments.

Below is part of the illustration of a 25 year endowment mortgage that I was shown in January 1993 regarding the future benefits of a Build-up plan.

(a) a rate of return of 7.80% per annum is £ 45000
(i.e. your mortgage would be repaid in full)

(b) a rate of return of 10.50% per annum is £ 65100
which would give you a cash surplus of £ 20100

(c) a rate of return of 7.00% per annum is £ 39300

(These projections are based on an investment premium of £59.55)

At the end of the term, a guaranteed basic sum of £16560 will be payable to which bonuses will be added.

It also says "The current rate of reversionary bonus is 3.50 % of the guaranteed basic sum assured plus 6.80% of accumulated bonuses. The rate of Terminal Bonus will vary according to year of entry and is subject to variation at any time"

Question 1) Am I correct in assuming that the projections should have been based on an investment premium of £55.20? (i.e. £16560 divided by 300).

Question 2) I have used an investment calculator to check the projections and have come up with what I think of as "net" interest rates which are (a) 6.56%, (b) 8.85% and (c) 5.68% and presuming these "net" rates are a result of taxation, give taxation rates of (a) 16%, (b) 15.73% and (c) 18.85%. My question is that (a) and (b) are similar but (c) is somewhat higher Why is that so? or am I oversimplyfying things? or am I just barking mad?

Thanks for reading this.

crw21

Hi I have had an offer of compensation from Standard life for my endowment - which looks fair - but I know that from early 1997 until MIRAS ended-which I don't when that was - I was renting the house out and was not[FONT=&quot] eligible [/FONT] for MIRAS - -at the moment in the calculation they have assumed MIRAS applied for the whole time -is it likely to have an effect on my compensation payment - would it be more or less?
Thanks crw21

timbur

May I ask readers, interested in endowment misselling issues, to comment on the following:

Suppose a building society adviser (or other Independant Financial Adviser) recommends to an existing mortgagor that he/she/they surrender an existing endowment and take out a new endowment in it`s place.The building society admit the wrongdoing (called a "churn") and there is no mitigation. The churn was done simply for the sake of the commission gained on the sale of the new policy. The statement that helped the churn along: "the new policy would do much better" was not an honestly held opinion, and was uttered simply to secure the sale. For a further description of churning see the Financial Ombudsman Service (FOS) website, or punch in "churn" on a search engine.

The search engines will find lots of references to "churns", even more to "fraud". You will also find any number of references to "churning endowments" but almost nothing in response to the question " is churning an endowment fraud?" Churning is a clear breach of the Financial Services Authority (FSA) rules, but they have not, so far as I am aware, labelled a churn as fraud. US attorneys will argue that the churning of stocks and shares to generate commissions is fraud, and there seems absolutely no reason why churning endowments in the UK is not analysed in the same way. I exclude the honest mistake of the office junior out of his/her depth. Assume the churn was done by someone who knew exactly what they were doing, simply to earn a commission.

Is this civil fraud, or "deceit", as described in Derry v Peek 1890?

The case reviewed the authorities, and concluded that deceit was proved where there was: "a false statement of fact (a statement of opinion can rank as a statement of fact) made i) knowingly, or ii) without belief in it`s truth, or iii) uttered recklessly, careless as to whether it be true or false." Motive is not relevant to liability; thus the fact that the maker of the statement intended no harm is not a defence. However, where the motive was simply to make a financial gain, and the advice was given knowing that harm to the victim was likely or inevitable, might result in an increase the damages]

There is a similar definition in the Fraud Act 2006 in regard to the components of criminal fraud, and it is conceivable that the same conduct might also result in criminal liability under the Fraud Act 2006, or, where the case occurred some years ago, under the then applicable legislation.

If it is fraud, claimant`s may well need to consider their rights under the general law ie the county court/High Court, rather than rely on the FOS. The guidance formula applicable to churns, provided by the FSA to the FOS, can produce startling injustices. You will find the formula(s) set out in the FOS website. It assumes that the real loss is caused by the policyholder having to pay for two set-up charges rather than one. It seeks to undo this by restoring the set-up charges lost in the churn.Thus, it takes the churned policy, works out the investment in it (the total premiums paid over it`s life up to churn) adds interest, and deducts the surrender value. It then sets out to compensate for any additional costs in servicing the new policy over those that would have been incurred had the churned policy continued ie was the later policy more expensive? It will also, where appropriate, compensate for the loss of Life Assurance Premium Relief. The assumption is that this sets you on level ground again - the bad effects of the churn have been removed. What it does not do is consider the value of the vested right the policy-holder had to participate in the future maturity value of the churned policy.The future maturity value itself, as a quantified sum, cannot be the subject of ownership until maturity, but the opportunity to gain the maturity value by retaining ownership of the policy until it matures, is a property right and this is removed by the churn. Further, what the victim had was unique in terms of the time-frame in which it ran. To say that a policy due to run from 1980-2005 is effectively replaced by a policy running from 1989-2013 is to ignore reality.

The FSA are trying to produce a rule of universal application. However to ignore the "lost opportunity to obtain the maturity value" can be very unjust to complainants, especially where the churn occurs relatively late in the life of the policy. It seems entirely wrong that a fraudster is, in effect, benefitted by the routine application of a formula designed to do justice in a very different situation. It is submitted that where the claim is brought at a time when the maturity values are known, those values should be taken as the start point of the loss.

The approach of the general courts should cater for this. Losses, following a fraudulent misrepresentation which induces a contract (the purchase of the new endowment) do not have to be forseeable in order to be recoverable, merely that they were caused directly by the wrongful act.There seems no reason in principle why the "but for" causation test cannot be applied. "But for" the churn, what would the complainant have done? "Kept the policies until maturity" would be the usual answer, and there may well be evidence to support this. Thus he should be entitled to all the direct consequences of the wrongful advice to surrender. Windfalls that, but for the churn, would have been received on the churned policy, are generally irrecoverable under FSA guidlines, but might be recoverable as directly caused losses. Ditto the maturity values of the churned policies, if those values could be ascertained.

The involvement of fraud may help with time bars. Where the building society or other wrongdoer has concealed relevant facts, time will only run from the point when you might reasonably have discovered those facts. Thus fraud, plus concealment, may give you more time. If you want to read more about time bars there is, in my opinion, an excellent article on the topic that you can download from the internet-Limitation and Consumer Financial Services Complaints by Adam Samuel.

What is said above, in connection with churns, would be equally applicable in other cases, if fraud could be proved. I have dealt with churns because a) this is the issue with which I am currently dealing, and b) churning appears, in the spectum of wrongs done, to be at the extreme end of the scale, and it might be more difficult to establish the requisite intention or recklessness in cases of, say, advice simply to take on an endowment rather than a straight repayment mortgage.

I would be very interested in hearing from anyone in the UK who has been the victim of a churn and has taken action to recover their losses, particularly if the advice they obtained was to allege fraud.

Timbur

Crazy_Saver

timbur wrote: »

I would be very interested in hearing from anyone in the UK who has been the victim of a churn and has taken action to recover their losses, particularly if the advice they obtained was to allege fraud.

Timbur

Hello again timbur.

I am currently fighting a churning claim but only through the FOS as our current finances definately wouldn't stretch to court action.

Good luck with your quest;)

Jeanie59

Should we give up ...all this is new to me.

Our mortgage finishes in 3yrs and we'll owe a few thousand when we should have had loads.
Nat west kept writing to us but we ignored them i suppose its our fault, but we thought they just wanted more money.
We put in a claim with a freebie soliciter we were turned down by the ombusman,that was early this year.
It was 1993 when we took endowment out and they said we'd had plenty of warnings from the bank to sort it out.
What they dont realize is we just didnt understand what was going on, we're running out of time hubby 62 me nearly 60yrs

Should we apeal to natwest?

Advice please........nothing too complicated.
Jeanie

tightwadman

Has anyone actually tried taking legal action in the small claims court against either

a) the company behind the endowment
b) the IFA or whatever who sold the policy in the first place?

The legal action would be for negligence based on the fact that the complainant had been caused a financial loss and could be up to £5,000 in value. There is the possibility of further / additional action for misrepresentation on the original sale of the policy? This would surely be the case for those whose original endowments will not / have not paid off the associated mortgage?

Has anyone secured details of the actual commissions paid to IFA's for selling endowments and how long these were paid for?

dunstonh

Has anyone actually tried taking legal action in the small claims court against either

a) the company behind the endowment
b) the IFA or whatever who sold the policy in the first place?

Not many. Most fail but a few have won on technicalities or by using a different approach.

The legal action would be for negligence based on the fact that the complainant had been caused a financial loss and could be up to £5,000 in value.

How do you prove negligence? That is going to be your problem.

There is the possibility of further / additional action for misrepresentation on the original sale of the policy?

How are you going to prove that?

This would surely be the case for those whose original endowments will not / have not paid off the associated mortgage?

There were never any guarnatees that the endowment would repay the mortgage and all the documentation issued at the time supports the fact that there was a risk. This documentation would be supplied in court. Your arguement back would no doubt be that you didnt read it but that is not the fault of the advising firm.

Has anyone secured details of the actual commissions paid to IFA's for selling endowments and how long these were paid for?

If a washing machine fails, you dont go on about the profit made by the retailer in the sale of the washing machine. Its irrelevent. However, the commissions are paid until maturity, surrender or death.

Your problem (and the problem faced by those that have tried and failed) is that the documentation is considered more heavily by the court than the FOS would consider it. The illustration first page that was given to you and a second copy provided with the cancellation rights stated that you could get back more or less. Whilst the FOS disregards this document, the court wouldnt. Plus, it is your word against theirs. You will need something stronger than that.

Gemmzie

I'm a bit lost on this endowment stuff, we have an endowment for £50k, it's seriously under performing and looking to pay out at around £35k with bonuses. We only actually need it for £33k on the Interest Only bit of the mortgage.

Has this been mis-sold? Surely the bonuses aren't guaranteed

dunstonh

it's seriously under performing and looking to pay out at around £35k with bonuses.

How do you know? Even endowments on track for surplus can show shortfalls on the projections.

Has this been mis-sold?

Invesmtent returns are not something you can complain about or get an upheld complaint on. Mis-selling has to do with misrepresentation of risk. Were you aware you could get back more or less with the endowment? What was your reason for choosing endowment?

Surely the bonuses aren't guaranteed

Annual bonuses are, the guarnateed sum assured is. Terminal bonuses are not. However, many endowments dont include the current accrued terminal bonus in their projections (which can undertstate the real position).

melorac

I sent off my letter today... although I am not too hopeful how my complaint will be received.... :eek:

Unfortunatley,I was a little confused about the whole thing, , and I think I have missed the "endowment complaint" boat and have I left it too long before complaining about being missold my policy.

But I am not completely dispondant about the situation... hence I still sent the letter....
And think I am a little addicted to this money saving stuff :T