legal rights - financial ombudsman

cratchit

Can anyone explain to me why the Financial Ombudsman legally cannot uphold my complaint on "with profit" section of endowment policy? The FO and Abbey National have agreed the policy was mis sold and Abbey agree to re-imburse, but not for the loss of profits. I have a letter from Abbey, which I forwarded to the Ombudsman as proof of profit assurance, in which Abbey stated Quote:

"There was no reason to believe at that time that bonus rates would not continue at that level. As a result, the projected levels of return assumed were based on higher anticipated bonuses than are actually being paid now". Unquote.

They have admitted they did not anticipate profits would fall and therefore did not pass this information onto the consumer, ie: me. I was not given a chance to assess the risks based on profits falling because I was never told they would fall. The policy was not a high risk, high profit, but a moderate standard with profits policy,based at the very minimum return of the rates at the day. Indeed the very name "with profits", says it all.

I was sold this policy on the basic minimum return on my money based on the rates of the day, but the predicted outcome was obviously much higher. Now they say there is no proof profits were assured. Surely this letter admitting they had no reason to believe profits would fall from the date the policy was sold is an admittance I was given assurance of profit. The Ombudsman says it is not - what can I do please?

EdInvestor

Can anyone explain to me why the Financial Ombudsman legally cannot uphold my complaint on "with profit" section of endowment policy? The FO and Abbey National have agreed the policy was mis sold and Abbey agree to re-imburse, but not for the loss of profits.

Compensation for misselling is not based on loss of profits.It is based on putting you in the postion you would be in if you had not purchased the product - in this case, if you had taken out a repayment mortgage instead.

Poor performance is not a ground for a misselling complaint.
Profits or losses are not relevant.

dunstonh

Surely this letter admitting they had no reason to believe profits would fall from the date the policy was sold is an admittance I was given assurance of profit.

Saying that they believe there is no reason why xyz may happen is a long way from saying they guarantee xyz will happen.

Ed has correctly given the position they should take.

Remember, your mortgage payments have dropped big time over the years because of the lower interest rates and your property value has rocketed. The drop in interest rates and low inflation are on the main reasons why endowments (or at least the investments within them) have failed to perform as well. You could easily argue that you are better off, even with a failing endowment policy then you would have been had the old boom/bust high inflation economy continued and the endowment ended in surplus.

cratchit

Thanks everyone for clarification. I guess the point I was trying to make was that I was never told the rates would go down, as at the point of sale, as admitted in the letter by Abbey, they never assumed, nor anticipated they would. All the forcasts predicted rate rises, so I how could I make an informed choice about taking a risk ie: the product not performing and the rates dropping, if I was never informed of same? Surely the point is not whether I am better off because of property rises, nothing to do with the product I purchased, but whether I was duped and fraudulently misled and whether that lender now has a duty to uphold the contract we both legally signed. I purchased a very low profit no risk policy precisely to be safe, I did not want a rich quick scheme nor something for nothing I wanted a safe secure savings policy to pay off my mortgage and give me something extra - that was what the policy promised. If I was told, even though it was a low profit policy there was a chance there would be no profit at all - why would I have taken it out? I could have put my money in a savings bond which was guaranteed, so I was totally misled and I don't understand why the FO is not making Abbey live up to what they sold me. Everyone knows these policies were sold on a "with-profits" basis, if they were sold on a "maybe profits basis" no-one would have purchased them. I feel angry and wonder what good the FO is if he cannot make Abbey uphold their deal. They have no paperwork signed and dated showing I was told there could be a loss but I have paperwork signed and dated showing they never anticipated any losses, so why am I the loser?

EdInvestor

cratchit wrote:

Thanks everyone for clarification. I guess the point I was trying to make was that I was never told the rates would go down, as at the point of sale, as admitted in the letter by Abbey, they never assumed, nor anticipated they would. All the forcasts predicted rate rises....

As they still do, to this day.Projections always say what the outcome will be @ 4% growth, 6% and 8%.

I don't think they want you to think about what it might be at 0%, -4% and -8%, but it may be that they think the answer is obvious, of course

dunstonh

I don't understand why the FO is not making Abbey live up to what they sold me.

The compensation method is farcical.

We have a situation where a stock market crash occurs and values fall. Totally normal and an expected occurance in a 25 year period. In the early years it is a very desirable thing to want to happen. Even though it would appear on paper in that short term to be a bad thing.

So, to pay compensation just after a crash, means you are paying out more than is really needed. You ask most in the industry what method they would have preferred and it would have been guaranteeing the full value at the end. Perhaps on the basis that an upheld complaint should pay off the mortgage, regardless but with no surplus paid if one is achieved. It appears that some lobbying must have been done somewhere to come up with this stupid system. My guess is that some of the lower solvency insurance companies couldn't afford to underwrite potential shortfalls long term.

We currently have the situation where people are got compensation a few years ago of quite high amounts and now their endowments, which they chose to keep, are going back into surplus again on the projections. In these cases, they have got a load of free money. Whereas you have some others with really poor endowments who have chosen to stay put hoping things improve without realising there is little chance and their shortfalls are likely to get worse not better. The compensation is going to do them little good.

I feel angry and wonder what good the FO is if he cannot make Abbey uphold their deal.

The FSO and Abbey didnt make the rules.

so why am I the loser?

You are not though. You complained that you should have gone with a repayment mortgage as the risk was too high on endowment. Abbey agree with that and are providing you with the funds to put you in the position you would have been had you been on repayment from the start.

if they were sold on a "maybe profits basis" no-one would have purchased them.

My experience is that most consumers bought them because the monthly payments were cheaper than repayment mortgage or their parents had encouraged them. Sure thats not the case for all of them but a great number didn't need selling.

From the mid 1990s the illustrations would normally have shown the 4% growth figure as providing a shortfall along with a warning that you could get back more or less than the figures shown. If you choose not to read it, that should be your fault. In any other country, you would get no compensation. You are lucky that the UK is highly regulated on financial services and stacked in favour of the consumer.

silvercar

My experience is that most consumers bought them because the monthly payments were cheaper than repayment mortgage....

Totally agree, but the question was, 'How do you want to pay [off] your mortgage, endowment or repayment?'

People chose endowment either because it was cheaper or they fancied the lump sum at the end. They still expected the mrotgage to be paid off 25 years later.

In fact, in the more responsible lending era of the 80s you had to tell the lender how you intended paying off the mortgage (interest only wasn't acceptable). If you chose replayment the lender knew your payment schedule would pay off the mortgage. If you chose endowment the lenders generally had the policies assigned to them - the lenders wanted that security.

Nowadays it is very easy to get interest only mortgages. I have a few friends who know that the only way they will pay off their mortgage is to trade down. With house prices having rocketed in London in the last 15 years they know they will be able to do that.

Ian_W

cratchit wrote: If I was told, even though it was a low profit policy there was a chance there would be no profit at all - why would I have taken it out? I could have put my money in a savings bond which was guaranteed

To get the mortgage you wanted I expect, which you wouldn't have got with the "guaranteed" savings bond. With profits was portrayed as "low risk" but not "no risk" IMO - any investment carries risk, even your bank account [or savings bond] has a small risk attached.

Doesn't your policy show a minimum sum assured on maturity, which is much lower than the life assuance or mortgage you took out? Why would it show this much lower figure as being it's guaranteed pay out at maturity, if the profits themselves were guaranteed?

I agree with dunstonh that the way compo is worked out isn't as satisfactory as simply underwriting that all endowments would cover the mortgage they were taken out to pay off. However if you took the endowment in order to get a mortgage and the endowment was deamed mis-sold, ie it shouldn't have been sold to you, then your option would have been to have a repayment mortgage and the compo puts you in the same position as if that had happened.

I just can't see how you can expect compensation for profits which never materialised. Sure there were illustrations of sums that would materialise at different rates of growth but none of those rates was guaranteed to be the minimum, the minimum is the sum assured in the endowment contract you received.

EdInvestor

I just can't see how you can expect compensation for profits which never materialised.

There is a very widespread misunderstand of what "With profits" actually means.

It doesn't only mean smoothing and guarantees to reduce the impact of market falls (ha ha ).

It also means you are participating in the profits and losses of the life insurance company which is providing your policy. Like a shareholder with a plc.Some of the money you pay in is invested in the stockmarket/property/bonds etc, but not all of it.Some of it is going to provide capital for the company's business.

Hence, if the company as a whole makes money, which was generally the case in the 80s and 90s, part of the profits goes to the WP policyholders. But if it makes lossses, then they must bear them too.

This is particularly risky at a mutual life assurer, like Equitable or Standard Life, because mutuals cannot raise money from the stockmarket .So if they make losses, what happens is the value of the policyholders funds must be cut. If they make profits, and then go onto to the stockmarket, the policyholders get windfalls - again their reward for contributing towards the running costs of the company over tyhe years.

Unfortunately most people had no idea about the "with losses" aspect of "with-profits", so in a way cratchit is right.

However I've not heard of any successful misselling claims based on people not being told about the risk of "with-losses". Not yet anyway

Ian_W

Ed,
Hindsight is such a wonderful gift - you never need glasses - it's always 20/20 full-on.

When I bought our E/Ps in the mid to late 80's everyone - IFA's, financial journos, Which?[of endowmentaction fame no less] even lenders - you had to assign them, if you remember - thought they were the cheapest and best way to get a mortgage. If the Investors Assn had been in existance I'm sure they'd all have been saying the exact same thing. And the Gold standard was Standard Life. Why? Because hindsight and experience of friends and family said, Not only is it cheaper but you'll also probably end up with a tidy surplus as well as paying off your mortgage. It had happened that way for 30 years or more.

At the time most EP's were "mis-sold" no-one even conceived that "with losses" could happen, it wasn't on anyones radar, so why should people have been made aware of it? Belongs to the same mentality as apologising for our colonial past IMO.

Point that doesn't require hindsight, forsight or second sight which I was making is that WP policies come with a "basic sum assured" and if you read that in plain English, which most WP stuff isn't, it means - this is what you're guaranteed, everything else isn't. It's what we expect, project, hope for but it isn't guaranteed. If it ain't guaranteed why expect compo if it doesn't materialise, no matter how much everyone expected it to?

EdInvestor

At the time most EP's were "mis-sold" no-one even conceived that "with losses" could happen, it wasn't on anyones radar, so why should people have been made aware of it?

Really? Did you think that no mutual or insurance company ever went belly up? What about UKPI, failed in 1986, had to be rescued by Friends Provident?

Why do you think there were all those demutualisations in the 1990s?
Could it be these mutuals were all desperately short of new capital?

Do you think a company which is short of capital and has no shareholders, only members like us, is risky?

if you don't, you should. All those mutual managements thought that (except Equitable, which was so far gone nobody would buy it), that's why they demutualised.That's why Standard life is demutualising now, because the members are being exposed to too much risk.

THis may not have been on your radar screen, but it was certainly well known in the industry,and by the regulators.