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ombudsman news

issue 11

November 2001

the Taber test case and windfalls

Since the last investment issue of ombudsman news, the PIA issued Regulatory Update 94 (RU94), dealing with the outcome of the Needler Financial Services v Taber case. Details are on the FSA website. The regulator proposes to consult on its draft guidance on the treatment of windfall benefits, with a view to issuing formal guidance. Although that guidance is unlikely to come into force before May 2002, RU94 provides the basis for moving forward. We stated in the August issue of ombudsman news that we would be reviewing matters after 17 September, and we are now able to confirm our current position.

windfalls in pensions and FSAVC (Free-Standing Additional Voluntary Contributions) review cases

The PIA Ombudsman Bureau's terms of reference required it to follow the PIA's standards for the review of pension transactions. Regulatory Update 89 (RU89) allowed firms dealing with cases where the investor had received a windfall in cash or shares to suspend progress, if they wished, at the point where the windfall became a relevant issues (for the calculating of loss). Any of these suspended cases will now be decided in accordance with RU94. Exceptionally, for cases where the policy has been enhanced by a windfall benefit, we will wait until the publication of the revised regulatory guidance before making a final decision. As RU94 follows our understanding of the Court's view, all investment division cases are now worked on this basis.

windfalls in mortgage endowment complaints

There is no regulatory guidance for the handling of these complaints and we reach decisions based on the facts and circumstances of each individual case. Where these cases involve windfalls, the High Court decision in the Taber case now provides additional judicial guidance on the relevant principles when we calculate compensation.

This judgment makes clear that:

  • any benefits received from a demutualisation were not received as a result of the firm's negligence; (in the Taber case, benefits were taken in the form of shares, but referred to in the judgment as potentially being taken in the form of cash or additional bonuses);

and therefore

  • the value of the benefits received does not need to be taken into account to reduce the amount of any compensation payable to a policyholder.

We will continue to look at the particular facts and circumstances of each individual case. Where customers received a windfall benefit, in whatever form, we will generally disregard the value of this benefit when we decide the amount of compensation they should receive.

RU94 prohibits firms from making offers of compensation that deduct the value of any windfall benefits, in whatever form these benefits are received - whether as shares, cash, additional bonuses or other enhancements to the policy.

Case law has determined the appropriate treatment for complaints of this type, so in the absence of any regulatory guidance, we will continue to make our decisions in accordance with the law, taking into account the particular facts and circumstances of each case.

The Taber judgment did not specifically refer to windfall benefits received, in whole or in part, in the form of policy enhancements. We will not issue final decisions on cases involving this type of windfall benefit until after the regulator has published its guidance. This will only affect a small number of cases.

RU94 does not prohibit firms from making offers that exclude all benefits, and we would not seek to disturb offers made to policyholders on this basis. However, we will defer making a final decision in any of these cases where the firm and the policyholder cannot reach agreement on the suitability of an offer.

case studies - windfalls

These cases illustrate the response of firms to windfalls, the Taber case and the publication of Regulatory Update 94.

11/01

Mr and Mrs B complained that their adviser never told them their mortgage endowment policy might not produce enough to pay off their mortgage. We issued a provisional decision upholding the complaint and suggesting the firm should calculate compensation in accordance with RU89. This showed that the couple had made a loss of £262.03.

Mr and Mrs B had received windfall benefits and the firm wanted to deduct them from the compensation. If it had done so, this would have cancelled out Mr and Mrs B's loss. However, following the result of the Taber court case, the firm accepted that it should pay the full amount of compensation.

11/02

In January 2001, Mr and Mrs A discovered that their mortgage endowment policy was likely to produce £6,650 less than they needed to pay off their mortgage. They complained that the firm had mis-sold the policy. It had not discussed any alternative types of mortgage with them, and disregarded the fact that they did not want to take any risk.

The firm was unable to produce much documentation from the time of the sale. However, the information we obtained from Mr and Mrs A by means of the mortgage endowment questionnaire indicated they were cautious investors, for whom an endowment policy was unsuitable.

We upheld the complaint and awarded compensation calculated in accordance with RU89, plus £200 for distress and inconvenience. The couple then converted their mortgage to a repayment-only basis.

It was important to ensure that rectifying the mortgage endowment mis-selling did not result in the couple being penalised for the deterioration in health they had both suffered. Mrs A's health had already been poor at the time they took out the endowment mortgage policy; her husband was subsequently diagnosed with a serious illness. Taking out a life assurance policy to cover the repayment mortgage would now be very expensive for them. We therefore decided that the firm should compensate them for this. We awarded a sum representing the difference between the cost of a decreasing term assurance policy now, compared to its cost when they first took out the mortgage.

Mr and Mrs A had received demutualisation benefits from the product provider that supplied their endowment policy. The firm wanted to deduct the value of these benefits from the amount of compensation it paid. However, in view of the outcome of the Taber case, we ruled that it could not do this.

11/03

Mr and Mrs D complained when they discovered that their mortgage endowment policy was not guaranteed to repay their mortgage and did not mature until Mr D was 67.

The firm accepted our view that it should carry out calculations, in accordance with RU89, to establish whether the couple had suffered a loss as a result of having the mortgage endowment policy rather than a repayment mortgage taken out over 18 years (to end at Mr D's normal retirement age).

The firm did not accept that it should not deduct from any compensation

  • the value of windfall shares the couple received from the policy provider's demutualisation; and
  • the notional "savings" the couple made as a result of paying less, to date, under the existing endowment arrangements than they would have paid for an 18-year repayment mortgage.

Eventually, after further correspondence with us and after the appeal period in the Taber case had expired, the firm agreed not to make any deduction for the notional "savings". But it said that "as a gesture of goodwill" it would deduct only 50% of the current value of the couple's windfall shares.

The comments of one of the High Court judges in the Needler Financial Services v Taber case were relevant here. He said that windfall shares should not be taken into account if they were received as a result of the decision to demutualise, rather than as a consequence of advice from the person who sold the policy that gave rise to the entitlement to the "windfall" benefit. We therefore ordered the firm not to deduct the value of the windfall shares from the compensation.

Walter Merricks, chief ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.