ENDOWMENTS: FSA LETTER TO CONSUMERS' ASSOCIATION
6 Jun 2002 10:43 AM
Howard Davies, Chairman of the Financial Services Authority (FSA),
has today sent the following letter to the Consumers' Association
(CA).
"Thank you for your letter of 21 May. It raises a number of points,
and in particular provides me with the opportunity to restate the
overall approach which we have taken to endowment mortgages, and to
explain the substantial body of work that has been, and is being,
undertaken here.
The overall FSA strategy as defined publicly in October 2000 has
been:
- To ensure that consumers are well informed, are encouraged to
complain where they are unhappy with the advice they were given, and
that they are treated consistently and fairly when they do so; and
- To follow through on identifying potential 'pockets of loss' in a
focused way, in order to see redress delivered effectively to
consumers who have lost out as a result of poor advice.
As a result of our actions, in early 2000 every mortgage endowment
holder received from his or her provider an FSA factsheet. This
explained the economic reasons for lower growth rates in endowment
policies, leading to potential shortfalls. It also outlined the
circumstances in which consumers could lodge a complaint. Through the
ABI we ensured that all policy holders were then sent a clear,
standard format 're-projection' letter. That letter clarified whether
there was a potential shortfall on their policy, and what the options
were if this was the case. It explained that a process had been put
in place to ensure that policyholders would be sent a reprojection
letter at least every two years in future. We believe that these
letters put policyholders in a good position to decide on a response
which is appropriate to their circumstances.
We have been monitoring firms' conduct of the re-projection exercise
very carefully. Our research, conducted in Spring last year,
indicated that only three out of ten policyholders had by that time
taken action to remedy their potential shortfall (see our press
release on 2 July 2001: "Endowment Mortgages: seven out of ten
households have taken no action"). Around half of those who had taken
no action said they had good reasons (such as that they had repaid
the loan by other means and were continuing to fund the endowment,
but as a savings vehicle). This left a third of policyholders who
were undecided or who were content to let the position ride. Some of
them should undoubtedly be taking further action.
The current, second round of re-projection letters is likely to
stimulate further responses. Firms are required to issue reprojection
letters with the FSA factsheet 'Your endowment mortgage - time to
decide'. This factsheet is designed to ensure that all consumers
understand the options open to them to make up any shortfall, and
that those who have reason to believe they were mis-sold are fully
informed of their right to complain. It was consumer tested on the
target audience, endowment policyholders, who were very positive
about the content and felt it gave them the information they
required, both about complaints and about how to make up a potential
shortfall. The feedback also showed that they wanted the letter from
their provider to make clear that this information came from the FSA
as the independent regulator rather than the firm. A sentence in bold
was therefore inserted in the first paragraph of the reprojection
letters which reads: 'The enclosed factsheet about your options is
from the independent watchdog set up by the government, the Financial
Services Authority (FSA). Please read these documents carefully.'
The factsheet spells out the circumstances in which consumers may
have a valid complaint and says 'If you think you have a valid
complaint, take action now - if you delay, you could lose the right
to some or all of any compensation that may be due to you. Wait for
the outcome of your complaint before taking further action.' It also
makes clear that consumers who want to make a complaint can get the
FSA factsheet 'Endowment Mortgage Complaints' free from our helpline
or by downloading it from the website.
We also included a new section in the factsheet: 'What to do next if
you want to make a complaint but are not sure if you have a
reasonable case'. Feedback from our research had shown that this was
an area of concern, as was the decision on the further steps they
should take. This section refers people to our complaints factsheet
and to the Financial Ombudsman Service case studies, which enable
consumers to compare their own case with those that the ombudsman has
already assessed as reasonable complaints. We have also explained how
people can track down the firm or adviser who sold them the policy if
they did not buy it directly from their endowment provider.
We do not believe it would be appropriate or proportionate to also
include the more detailed factsheet 'Endowment Mortgage Complaints'
with the reprojection letters. This factsheet is relevant only to
those who wish to make a complaint, not to those who wish to know how
to make up a potential shortfall but are not considering making a
complaint.
Alongside this work directed at getting information into the hands of
consumers, we published guidance to firms last year to ensure a
consistent approach to their handling of mortgage endowment
complaints. Our latest figures show that just over 100,000 such
complaints have been received by firms since the reprojection
exercise started in April 2000 (representing around 1% of all
policies). Over one third of these complaints have been upheld by the
firm, leading to average redress paid of £3,000. We continue to
monitor closely the effectiveness of product providers' complaints
handling processes, and are working closely with the Financial
Ombudsman Service. We assess evidence of flaws in those processes and
regulatory breaches and, where appropriate, we investigate and take
disciplinary action to help safeguard consumers.
As part of this work, John Tiner wrote to all the Chief Executives of
the main endowment providers, and the largest IFAs, in April this
year, drawing general attention to issues of concern that had arisen
from our supervision of mortgage endowment complaint handling in
firms. Firms were asked to respond to our letter and to review and if
necessary to revise their complaints handling procedures in the light
of the concerns expressed.
We therefore continue to follow a stratified approach, as suggested
in your letter; we focus on areas where there are high concentrations
of consumer risk. We have identified, and required firms to resolve,
a number of areas of significant consumer detriment, caused by
pockets of mis-selling and mis-pricing of products. As a result, to
date 20 firms have agreed proactively to compensate policyholders who
were mis-sold their policies. This involves around 218,000 policies,
leading to total compensation of around £315 million due to be paid.
We will continue to fulfil our commitment to investigate areas of
potential consumer detriment such as high charges and excessive
growth rates. We have focussed on specific firms and required them to
pro-actively compensate consumers. We have taken public enforcement
action against two firms so far and are continuing investigations
into a number of firms where there is evidence of potential
mis-selling. Where such mis-selling is established we will take steps
to ensure that consumers receive appropriate redress. Disciplinary
action against the firms may also result.
It is important to emphasise the economic background to these cases.
Just because consumers now face a potential shortfall does not mean
they were mis-sold the policy at outset. A number of those who
received a red or amber letter may well continue to consider that the
product is suitable to their needs, because they can afford to
increase the premiums, or because they are no longer using it to
repay their mortgage. We do not accept that identifying companies who
are the worst performers, in respect of investment performance, the
extent of shortfalls and the number of complaints in relation to
their mortgage endowments, would help consumers decide whether they
were mis-sold their policy. Such information could provide an
exaggerated incentive to complain, with no greater prospect of that
complaint being upheld. At the same time, disclosure of individual
firms' records by the regulator raises difficult confidentiality and
human rights issues.
You raised in your letter the question of policies sold before the
regulatory regime came fully into force, i.e. pre-April 1988. The
vast majority of pre-A day mortgage endowment complaints already fall
within the Compulsory Jurisdiction of the Financial Ombudsman Service
(FOS). Cases that do not fall within the Ombudsman's jurisdiction are
essentially those where the firms in question had not joined the PIA
Ombudsman Bureau's Voluntary Jurisdiction and have not subsequently
signed up to the FOS' Voluntary Jurisdiction arrangement. Under the
Financial Services and Markets Act 2001, the FSA has no power to
compel firms to subscribe to the Voluntary Jurisdiction of the
Financial Ombudsman Service.
Finally, you refer to potential mis-use of policyholders' funds in
meeting the costs of redress. The cost of compensating consumers
largely depends on the type of policy issued, and the circumstances
of each life office. The policyholders of mutual life offices will
share all the costs incurred by their office, just as they share all
the profits. In the case of proprietary life offices, the
shareholders may meet all or some of the costs, depending on the
nature of the policies issued. In the case of unit linked policies,
the costs would be met entirely by the shareholders, whilst for
with-profits policies the costs would be met by the fund and shared
among policyholders and shareholders, in the same proportion as they
share profits. This does not prevent a life office from using surplus
funds from past business, held in the with-profit fund, to meet some
or all of the redress costs, and need not therefore affect bonuses
for current with profit policyholders. We do not believe that the
current rule, allowing proprietary life offices discretion on how
they fund fines, is fair to policyholders. We have therefore proposed
a change to the current rules.
In a Consultation Paper published this month we proposed the
following amendment to the Interim Prudential sourcebook for
Insurers:
"If we impose a financial penalty (that is a fine) on a long-term
insurer, the insurer must not pay the penalty from any of its
long-term insurance funds. This includes any with-profits funds. This
would only apply to long-term insurers who are not mutuals."
The closing date for consultation on this rule change is 19 July, and
we hope that you will let us have your views on our proposals.
In summary, we believe that our overall approach to mortgage
endowments is fair and proportionate: it ensures that consumers have
the information they need to make informed decisions. Where they have
cause to complain our policy is designed to ensure that the industry
responds fairly. Where significant pockets of consumer detriment have
been caused by mis-selling, we require the firm involved proactively
to compensate its policyholders.
A full scale proactive review along the lines of the pensions review
would involve an estimated administrative cost of around £5 billion.
In our view this would be disproportionate. The population of
mortgage endowment cases with a redressable loss is much lower than
for pensions: in phase 2 of the pensions review, 80% of the cases
reviewed received redress. Moreover average redress paid to mortgage
endowment policyholders is around 20% of the figure for pensions
mis-selling cases of over £15,000, even though the administrative
costs per case are similar."
NOTED TO EDITORS
1. 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; securing the appropriate degree of protection of
consumers; and fighting financial crime.
2. The FSA aims to maintain efficient, orderly and clean financial
markets and help retail consumers achieve a fair deal.
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