LINCOLN FINED £485,000 FOR MIS-SELLING SAVINGS PLANS

16 Apr 2003 11:15 AM

The Financial Services Authority (FSA) has fined Lincoln Assurance Limited (Lincoln) £485,000 for the mis-selling of 10 year savings plans by its appointed representative, City Financial Partners Limited (CFPL), between 1 September 1998 and 31 August 2000. This caused financial disadvantage to a significant number of customers. Lincoln was responsible for the conduct of CFPL and has co-operated to ensure that all customers affected by the mis-selling will receive compensation.

The regulator visited Lincoln in 1998 and 1999 and an article subsequently appeared in Which? magazine criticising the company. Lincoln then conducted an initial sample review of 5,000 savings plans sold to customers between 1 September 1998 and 31 August 2000. As a result of the outcome of this review Lincoln was proactive in agreeing to conduct a review of all sales of the relevant savings plans by CFPL, 74% of which were to customers aged under 35.

Over 28,000 customers who were sold savings plans between November 1993 and October 2000 have been offered a review of their policy. £8.8 million has been set aside in compensation for approximately 5,000 customers who requested a review and are due redress. By the end of April 2003 all respondents will either have received compensation or been advised that their sale was compliant.

The failings arose because Lincoln did not adequately monitor CFPL and so failed to ensure that CFPL only recommended 10-year savings plans where they were suitable for the customers' needs. This led to young single customers being recommended unsuitable inflexible 10 year savings plans when other more flexible savings products, such as Individual Savings Accounts (ISAs) were available.

Carol Sergeant, Managing Director at the FSA, said:

"It is a key requirement that recommended products must be suitable for the customer's individual circumstances. This fine demonstrates the seriousness with which we view breaches of this requirement and our commitment to ensuring that customers will be properly compensated.

"The failings were particularly serious but Lincoln has been proactive in ensuring that customers are compensated where appropriate. Without this co-operation the fine would have been materially higher."

NOTES TO EDITORS

1. Lincoln Assurance Limited is a limited company and the primary UK company in the Lincoln Financial Group of the USA. Lincoln has been regulated by the FSA since 1 December 2001. Prior to authorisation by the FSA, Lincoln was a member of the PIA having been admitted to membership in November 1994. Prior to membership of PIA Lincoln was regulated by LAUTRO from April 1988.

2. Lincoln Assurance Limited disposed of CFPL in October 2000.

3. The savings plans sold by CFPL were 10 year endowment policies for general savings purposes. They were not mortgage endowments.

4. A copy of the Final Notice which fully details all facts and any mitigating circumstances can be found at www.fsa.gov/pubs/final.

5. CFPL and Lincoln (who was responsible for the conduct of CFPL) demonstrated failings that demand a significant financial penalty. These failings are viewed by the FSA as particularly serious in the light of the following factors:

- The breaches identified in this case are of a systemic nature, arising from weaknesses in CFPL's documentation and sales process and the monitoring of them by Lincoln with respect to sales of 10-year savings plans during the period in issue. These failures have caused actual or potential financial disadvantage to significant numbers of customers.

- These failings resulted in young single customers being recommended unsuitable inflexible 10-year savings plans with significant early redemption penalties when other more flexible savings products, such as ISAs, that did not have such disadvantages were available and could have met the customers' objectives more advantageously.

- Lincoln had been notified that PIA had concerns regarding the selling practices of CFPL after the Supervision visits in September 1998 and December 1999, and also by the issue of a formal warning in May 1998. This notification of PIA's concerns should have alerted Lincoln to potential problems with CFPL's sales process and focused their attention on ensuring that procedures were put in place and followed by CFPL advisers to ensure that the breaches of PIA's rules central to this case did not occur. Whilst Lincoln did take steps to deal with the failings of CFPL these steps did not eradicate the problems which subsequently came to light.

6. While the failings in this case merit a significant financial penalty, the FSA recognises the extent of the co-operation demonstrated by Lincoln once the failings had been drawn to its attention, including:

- Lincoln has acted in a positive and pro-active way to establish whether customers have been mis-sold, and if so, to provide compensation. Following an article in 'Which?' magazine in 2000, Lincoln immediately, and without awaiting the outcome of any investigation by the FSA, initiated a review of 5,000 cases sold to customers under 35 years old between 1 September 1998 and 31 August 2000 to identify whether there was evidence of the sale of an unsuitable savings product. The review showed that the documentation was insufficient always to justify the sale made. In assessing the results of the review Lincoln erred on the side of customers. On the basis of this initial review Lincoln proactively agreed to conduct a review of all sales of the relevant products by CFPL (a total of 28,295 customers) between November 1993 and October 2000 ("the Past Business Review").

- Lincoln worked closely with PIA and subsequently with the FSA to agree an appropriate methodology for identifying and paying redress to potentially disadvantaged customers. All customers were mailed during 2002 and the review is now nearing completion.

- Lincoln has spent considerable sums in conducting the Past Business Review. As at 12 February 2003, 12,731 customers (45.0%) have so far responded. Of these, 7,539 (59.2% of respondents) have declined a review and 5,192 (40.8% of respondents) have requested a review of their case. Of those who have requested a review, 5,090 (98% of respondents requesting a review or 18% of the total population) have received an offer of redress or their case was closed because no redress was required. Reviews of the remaining 102 cases are continuing. 4,027 customers have been paid a total of £7.3 million in redress, after taking into account the cancellation proceeds from their policies. The average redress paid therefore amounts to £1,809 per customer. The total compensation for the customers who have responded, after taking into account the current value of their policies, is calculated as £8.8 million.

7. These steps should ensure that customers will receive redress more efficiently and quickly than if Lincoln had not co-operated with PIA and the FSA in this way. In particular, Lincoln deserves credit for having voluntarily extended its review back prior to the period in issue and the FSA does not seek to assert or rely on any failings on the part of either CFPL or Lincoln during that prior period as providing any grounds for taking the action in this Decision Notice.

8. Accordingly, Lincoln has received credit in the level of financial penalty the FSA has decided to impose for the pro-active and co-operative steps it has taken. Nonetheless, while those steps provide an appropriate justification for mitigating the level of financial penalty, they do not alter the seriousness of Lincoln's failings, which occurred before any of those steps were taken. Given the aggravating factors, the financial penalty would, but for those steps, have been materially higher.

9. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection for consumers; and fighting financial crime.

10. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.

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