mortgage endowments – complaints about pre-"A Day" sales
This technical briefing note aims to draw together the available information on the ombudsman’s approach to handling pre-"A Day" mortgage endowment complaints. There is nothing new in the approach set out here - the principles discussed became well-established many years ago.
The note should not be taken to be a complete summary of the available information about pre-"A Day" complaints - readers are directed to material on the FSA’s website, setting out how mortgage endowment complaints should be handled:
May 2001 -
April 2002 -
FSA's letter to industry chief executives about consumer complaints and the mis-selling of mortgage endowments
Dec 2004 -
This note is based on the ombudsman’s experience of handling pre-"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 pre-"A Day" sale is one that took place before 29 April 1988 ("A Day") – the day the provision of investment advice became regulated under the Financial Services Act 1986.
Many home buyers took out endowment mortgages in the 1980s and many of the pre-"A Day" complaints we receive are about mortgage lenders. Typically, consumers say that their mortgage lenders told them this was the most appropriate mortgage for them to have, but did not tell them that the endowment policy might not repay the mortgage.
The complaint is often made after the consumer receives a so-called "red" re-projection letter from the insurance company, showing a high risk of shortfall. Consumers typically tell us that, if they had known there was any risk of a shortfall, they would not have taken out the endowment policy – they would have taken a repayment mortgage instead.
Some pre-"A Day" sales fall outside our jurisdiction – mainly those sales made by independent financial advisers (IFAs). But many are within our jurisdiction – because the sales were made by mortgage lenders or insurance companies whose pre-"A Day" sales could be considered by a previous ombudsman scheme.
We do not apply regulations retrospectively. When considering pre-"A Day" complaints, we ignore the post-"A Day" regulatory requirements and instead take into account the general legal principles that applied at the time.
In most cases, the main issues are likely to be whether the firm:
- made a contractual promise about how much the policy would pay on maturity;
- gave inappropriate advice (if it gave advice at all);
- misled the consumer about the terms of the policy.
We look at these three issues in turn below.
Consumers often say that the firm’s representative told them the policy would repay their mortgage when it matured. They frequently say they believed this to be guaranteed. We generally consider this aspect first. If we find that a contractually binding guarantee was given, then we will usually require the firm to honour its promise.
However, few low-cost endowment policies are unconditionally guaranteed to pay out at least the target amount on maturity. And it is rare that a consumer produces clear evidence that the firm gave a contractual commitment that the policy would produce enough to pay off the mortgage.
So in most cases we explain to consumers that, while they may well have been led to believe that the policy was designed to repay their mortgage – as indeed it was – this is not the same thing as giving a legally binding guarantee that this would happen.
Until “A Day” there was no regulatory requirement for firms to give advice – nor were they required to volunteer advice.
After "A Day", advice about investments had a specific regulatory meaning. Before "A Day", it had a more general meaning – effectively, giving an opinion about what the customer should do.
Many mortgage lenders say they did not give advice at all before "A Day". They say that they merely provided relevant information about endowment and repayment mortgages, allowing the customer to make an informed choice about which type of mortgage to take. Or they say they acted as an “introducer” – referring people who asked about an endowment mortgage to a product provider.
Many consumers, on the other hand, say they went to their bank or building society for a mortgage, and the branch manager or mortgage adviser told them an endowment mortgage would be the best thing for them to have. Often they say they were told that the policy would not only repay the mortgage but also provide a tax-free lump sum – perhaps enough to buy a car, pay for a holiday, or help with retirement planning.
We therefore have to decide in each case, whether the lender limited its dealings to providing of facts and figures about the mortgage and how it operated – or whether it went further and provided a recommendation about the appropriate course of action to take. Similarly, in cases referred against the product provider, we need to consider whether the insurer was actively involved in recommending its product and discussing the customer's requirements - or whether it merely acted on the agreement reached by the lender and customer.
Unfortunately, owing to the passage of time and the fact that fewer records were kept in those days, it is unusual in these cases for there to be much, if any, documentation from the time of sale to show what actually happened or what was said.
We reach our decisions on the balance of probabilities. We do not assume that advice was given. We look at the circumstances at the time and decide what is most likely to have happened.
Factors we consider include:
- the consumer’s recollection of events and what led them to take out the policy;
- the firm's account of events;
- the consumer’s financial awareness;
- any pre-existing advisory relationship;
- whether a mailshot (postal promotion) from a firm recommended existing customers to change from a repayment to an endowment mortgage;
- promotional material advertising the provision of advice;
- whether the firm received commission and/or submitted the application form.
We believe these are useful indicators in helping us determine whether or not advice was given. But we consider each case individually. For example, we may think it unlikely that a particular customer went to their lender and requested a policy – or that a financially naive borrower would enter into an investment contract without receiving advice to do so. On the other hand, we do not assume that if a firm received commission or submitted the application form, it necessarily gave advice – or that if a firm advertised that it could give advice, it did so in every case.
If a firm gave advice it had a duty to exercise reasonable care and skill, according to the standards of the time. If it recommended a policy that was clearly inappropriate for the customer’s circumstances, we would almost certainly conclude that it had failed to exercise reasonable care and skill.
Sometimes a policy might be inappropriate, because it should have been clear from the customer’s circumstances that they were unlikely to be able to afford the premiums over the full term. Or the policy may be inappropriate because it was clear that the customer needed a mortgage only as a short-term expediency and had no need for a long-term savings commitment.
But in most of the complaints we receive, the main issue is whether the policy represents a degree of risk that the customer was unaware of, and would have been unwilling to take.
Most pre-"A Day" complaints are about with-profits policies. The view of the industry at the time was that with-profits endowment policies were investments that achieved secure growth and presented little risk.
Indeed, firms will often argue that at the time these policies were sold, the prospect of their failing to meet their targets was so remote that no reasonably-minded adviser would have considered that risk at all likely. So how do we view the climate of the time?
There were undoubtedly many sound reasons for recommending an endowment policy – not least the genuinely-held belief that the policy would (most probably) repay the mortgage and provide a nest egg. But there was still a risk (however remote the industry, and others, considered it to be) that the policy might not repay the mortgage.
We often hear from consumers who were, at the time, unused to seeking financial or investment advice. They may have been looking for their first mortgage to give them a step onto the property ladder. Many will not have understood how these complex financial products worked and will have relied entirely on what the adviser told them.
We take this into account when considering whether the adviser adequately discharged their duty of care to these customers.
Few firms have disputed that it would not have been appropriate to recommend a with-profits policy to someone who was not willing to take even a small risk with the repayment of their mortgage – often referred to as a "risk-averse" customer. But, given the subjective nature of the task, disputes do arise as to whether a particular customer was, in fact, risk-averse.
how do we determine whether the consumer was risk-averse?
We don’t assume that all consumers were risk-averse, just because that is what they say now. Few customers would have taken out a policy if they had known for certain at the outset how things would turn out. But many customers may well have been prepared to accept a low risk in exchange for the probability (as it was seen then) of a surplus.
We may take the view that it is unlikely that a first-time buyer with no investment experience would have chosen to link their first risk-based investment with something as important as the mortgage over their home.
On the other hand, there is no reason why first-time buyers with no previous investment experience should have been precluded from taking an investment risk, and the opportunity of a higher return, provided they knew this was what they were doing.
We generally think that a consumer’s potential ability to cope with a shortfall at maturity is likely to have a bearing on their willingness, or otherwise, to take the risk of having to do so.
Sometimes firms ask us what combination of circumstances would lead us to decide that someone was risk-averse, or otherwise. There is no magic bullet or formula.
We consider all the circumstances to form an overall impression. And because we are making a subjective judgement on the individual case, 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 consumers were aware of the risk.
Some of the factors we may consider include:
occupation (and earnings)
- some occupations (financial advisers, bank managers, stockbrokers etc) suggest that the consumer may have had a higher than usual level of knowledge about investments and so was more likely to have been aware of the risk;
- some occupations (solicitors, barristers, accountants etc) suggest that the consumer is more likely to have read and understood the contract they entered into, and to have become aware of the risk;
- some occupations promise a rising income, so the consumer may be better placed to address – and therefore more likely to accept – a risk of a shortfall in the future;
- some occupations do not promise career development and/or promotion, so the consumer may not expect to be in a position to address – and may therefore be less likely to take the risk of – any shortfall;
- some occupations are less/more secure, promise better pension income etc.
The consumer’s occupation may, therefore, have an impact on both the level of risk they are likely to have been prepared to take, and on the level of care required of the adviser.
previous mortgage endowments
Sometimes firms seek to justify the sale of an endowment policy on the basis that the customer already had one. We do not think it automatically follows that because a consumer already had one of these policies, they understood (and were prepared to accept) the risks associated with endowment policies. It is possible that the earlier policy was sold inappropriately and that the consumer was unaware of the risks of that policy too.
If the consumer has successfully complained about the earlier policy, we are unlikely to rely on that policy as evidence to justify the later sale – although, of course, we recognise that a firm may uphold a complaint for commercial reasons, or because it no longer has documentation to support the sale.
But if the consumer has not complained about the earlier policy, this does not necessarily mean they understood (and were prepared to accept) the risks associated with that policy. It is natural for a complaint to be prompted by poor performance. A customer whose policy is "on track" is unlikely to consider that they have reason to complain – the policy appears to be doing what the adviser said it would do.
So we do not automatically treat pre-existing policies as pointing towards one conclusion or another.
Previous endowment policies are part of the consumer’s overall circumstances and may indicate that the consumer has some knowledge of endowments. A number of previous polices, particularly if sold by different firms, may suggest that the customer is likely to have gained some understanding of the product – but it may equally be the case that the customer gained no, or very little, knowledge from a previous sale.
Experience of other risk-based investments, such as stocks and shares, may indicate that a consumer is not risk-averse. But possession of a few shares acquired through employee share incentive schemes, or as part of a privatisation issue, is unlikely to be persuasive.
We also accept that consumers may have a different appetite for risk in relation to a small amount of “savings” (that are unlikely to be crucial to their long-term planning) than for major commitment such as a house purchase.
previous repayment mortgages
It is sometimes suggested (on behalf of consumers) that the fact that the consumer had a history of repayment mortgages is evidence that they were not prepared to take a risk with the repayment of their mortgage. While this is a factor we take into account, it is unlikely to be a persuasive argument. Few consumers will have deliberately chosen a repayment mortgage to avoid risk.
Some firms argue that consumers with a low loan-to-income multiple are more likely to be prepared to accept a risk with the repayment of the loan – because they can afford to. Some argue that a high loan-to-income multiple is indicative of a risk-taking attitude – if a consumer is prepared to stretch their finances by borrowing more, they are likely to be a risk-taker.
Neither argument is particularly persuasive on its own. A customer may have borrowed less to avoid risk. But a customer who borrowed more may not have wanted to take any chances with the repayment of a debt that large.
questions about risk on mortgage endowment questionnaires
Some questionnaires used by firms as part of their investigation of complaints contain “attitude to risk” questions. Usually the firm will ask the consumer to indicate on a rising scale what their "attitude to investment risk" was at the time the endowment policy was sold.
We do take account of such answers in our decision making, although we are more likely to be satisfied with evidence from the time of sale – or with the consumer’s recollections of what was said at that time – than with replies to questions that were posed after the event and that the consumer may not have understood.
Where the answers given on such questionnaires seem at odds with the consumer’s circumstances at the time of sale, we will often probe the consumers further. In these circumstances, is it not unusual for consumers to tell us they selected the “middle ground” because they are “ordinary” people, who would never select the extreme of any option given. So while we don’t disregard this piece of evidence, we do “test” the consumer’s understanding of it, and place it in the context of their overall circumstances.
illustrations and product brochures
It is unlikely that a pre-"A Day" illustration will show a potential shortfall, although most indicated that returns would vary, depending upon the level of bonuses added. Similarly, it is rare for pre-"A Day" brochures to contain clear shortfall risk warnings, although - again - most pointed out that returns may vary.
If the brochure did contain a clear warning, we might consider that a customer who went ahead despite this was not risk-averse – particularly if they claim to have relied on the documentation.
But we always bear in mind that the brochure is likely to have been of secondary importance in the sales process to the information provided by the firm’s representative. It does not necessarily follow that the consumer will have identified the risk from the brochure, if the representative did not mention it. Our view is that consumers were entitled to rely on the advice they received and that they were not under any obligation to check its accuracy.
It is unlikely, therefore, that the provision of a brochure or illustration alone would be sufficient to show that the consumer was aware of the risk – although it may be, if it is clear that the consumer read and understood the information it contained.
the consumer’s recollections and point-of-sale evidence of discussions
The most compelling point-of-sale documentation is customer-specific information which details how the customer would be able to cope with a potential shortfall. Not surprisingly, given the passage of time and the financial climate at the time, this is rarely seen.
However, a consumer’s recollections do sometimes suggest that risk was discussed. For instance, the consumer may say they had reservations about the policy – but that the adviser said a shortfall was “unlikely”. We may consider that this is sufficient to show that the adviser told the customer what any ordinary competent adviser would have said at the time – that the adviser considered a shortfall was unlikely, but not impossible. If we believe that the consumer was aware of the risks, we are unlikely to uphold the complaint (unless the policy was unsuitable for some reason other than risk).
However, more often with pre-"A Day" cases, we simply don’t know what, if anything, was said about risk. If we don’t know whether the consumer was aware of the risk, we may consider that, given their overall circumstances and likely attitude to risk, they would have taken out the policy anyway – even if they had been made aware of the risk. In this case, we are unlikely to uphold the complaint.
On the other hand, we may consider that the consumer’s circumstances make it unlikely that they would knowingly have taken such a risk – in which case we are likely to uphold the complaint.
Other factors which are often important in determining a consumer’s likely attitude to risk are:
- the age and maturity date of the policy, in relation to the consumer’s retirement;
- whether a consumer has children or others who are financially dependent; and
- whether the consumer’s income has allowed them to save.
Even if the firm did not give advice, a complaint may still be upheld if the firm misrepresented the position to the customer.
An active misrepresentation would be where the firm made an untrue and misleading statement about the features of an endowment contract, which induced the consumer to take out a contract when they would not otherwise have done.
However, it is also possible to misrepresent something by silence, or by giving only partial disclosure of the material facts – for instance, by telling only the good news and hiding the bad (for example, if a firm sends out a mailshot about endowments, extolling the benefits but omitting to mention that there is a potential downside).