skip tocontent

ombudsman news

issue 3

March 2001

pre-Financial Services Act mortage endowments

was advice given after 29 April 1988-

The rules under which we deal with complaints about mortgage endowments sold by banks and building societies will differ, depending when any advice was given.

  • If advice was given by a bank or building society before 29 April 1988 - the date when the Financial Services Act 1986 came into force - our banking and loans division deals with these complaints under Banking Ombudsman Scheme or Building Societies Ombudsman Scheme rules.
  • If advice was given after 29 April 1988, our investment division deals with them, usually under Personal Investment Authority Ombudsman Scheme rules.

The distinction is important because the record keeping and "best advice" requirements introduced by the Financial Services Act only apply where advice was given after 29 April 1988. This is often overlooked in media reports, which usually focus on policies covered by the Financial Services Act.

Financial Ombudsman Service briefing note

The Financial Ombudsman Service produced a briefing note about its treatment of mortgage endowment complaints. The final section deals with cases before 29 April 1988 - and says:

The position is somewhat different for endowment contracts where advice was given before 29 April 1988. The regulatory requirements governing the conduct of investment business (introduced under the Financial Services Act 1986) did not apply. So complaints where the advice was given before 29 April 1988 have to be dealt with according to general legal principles.

The principal issues are likely to be:

  • did the firm promise that a specified sum would be produced-
  • was any advice given-
  • if so, was the advice negligent-
  • if not, was the position misrepresented-
  • was there full and fair disclosure-

If the firm gave what amounted to a contractual commitment that the policy would produce a specified sum (eg sufficient to pay off the associated mortgage loan), it is likely to be held to be binding. As evidence of such a binding commitment would be required, this is likely to apply in only a small minority of cases.

Neither the lender nor the policy provider was under a duty to volunteer advice, even if the firm's advertising said that financial advice was available. But if the firm actually gave advice (either voluntarily or on request) it was under a duty to give that advice with reasonable care and skill. That is to be judged in the light of the circumstances as they were known or should have been known at the time, without applying the benefit of hindsight. If advice was requested on a particular issue, it does not necessarily mean the firm was obliged to volunteer advice on other issues relating to the same investment.

Where advice was given, it will be material to consider whether or not the customer was told that there was a risk that the policy might not produce sufficient to pay off the mortgage. And in the absence of such a warning, a further consideration will be what the customer would have done if the extent of the risk had been made clear.

Where advice was given and the customer is unable to continue paying the policy premiums for the full term of the policy (in order to obtain the full benefit of the terminal bonus), it will be material to consider whether or not the advice took into account affordability and the holder's likely ability to continue paying the policy premiums. If the policy term runs into retirement, the ability to fund the premiums after retirement may have been a material consideration.

Even if the firm did not give advice, it will be liable if it misrepresented the position. Misrepresentation can include only giving partial disclosure of the material facts. The law requires that the consumer be put in the position that he or she would have been in if the misrepresentation had not been made - not the position he or she would have been in if the misrepresentation had been true.

jurisdiction and compensation

The normal Banking Ombudsman Scheme and Building Societies Ombudsman Scheme jurisdiction rules apply. So we would not necessarily investigate a mortgage endowment complaint where there was no loss for which we could award compensation. With pre-1988 policies this is often the case.

This begs the question of how we calculate whether there has been any loss. We do this in the same way as our colleagues in the investment division. If the firm were at fault, compensation would be calculated in order to put the borrowers in the position they would have been in if they had not acted on the bad advice or misrepresentation. Usually this will involve comparing the borrowers' actual position, now, with what it would have been if they had taken out an equivalent repayment mortgage.

  • We look at the present surrender value of the borrowers' mortgage endowment policy (the amount they would get if they cashed it in). We compare this with the amount of capital they would have paid off by now if they had taken a comparable repayment mortgage instead, and we calculate if they are better or worse off.
  • We also look at the borrowers' mortgage outgoings. We compare the payments they have made until now on the endowment mortgage with the payments they would have made until now if they had taken a repayment mortgage instead. In doing this, we total the monthly payments, without applying any notional interest or discount.
  • When we calculate the outgoings on a repayment mortgage, we assume the borrowers would have taken decreasing term life cover - unless we are satisfied that they did not need life cover (eg where they had no dependants or already had plenty of life cover).

If the borrowers are worse off as far as capital is concerned, but better off on outgoings, we have to consider whether to take into account the notional past saving in outgoings.

  • Ordinarily, notional past savings are not taken into account. The borrowers will probably have spent them unknowingly on normal expenditure. The borrowers should not have to account for such past savings.
  • Exceptionally, the borrowers will be of sufficient means that it is reasonable to assume the notional past savings actually increased their means. In such cases, the borrowers should have to account for past savings to that extent (eg if they enhanced a deposit account balance). This could mean that it will only be reasonable to take part of the past savings into account.

This produces a variety of results:

  • Borrowers better off as far as both capital and outgoings are concerned. There is no loss. The borrowers are better off overall.

    For example

    Mr and Mrs A's endowment policy has a surrender value of £11,000.

    The capital that would have been repaid on a repayment mortgage is £10,000.

    They are £1,000 better off on capital. The total payments to date on their endowment mortgage are £30,000.

    The total payments to date on a repayment mortgage would have been £31,000. Mr and Mrs A are £1,000 better off on outgoings.

    They are £2,000 better off overall.
  • Borrowers better off on capital and worse off on outgoings, and their gain on capital is more than their loss on outgoings. There is no loss. The borrowers are better off overall.

    For example

    Mr and Mrs B's endowment policy has a surrender value of £12,000.

    The capital that would have been repaid on a repayment mortgage is £10,000.

    They are £2,000 better off on capital.

    The total payments to date on their endowment mortgage are £30,000.

    The total payments to date on a repayment mortgage would have been £29,000.

    Mr and Mrs B are £1,000 worse off on outgoings.

    They are £1,000 better off overall.
  • Borrowers better off on capital and worse off on outgoings, and their gain on capital is less than their loss on outgoings. The borrowers have lost the amount by which the outgoings loss exceeds the capital gain.

    For example

    Mr and Mrs C's endowment policy has a surrender value of £11,000.

    The capital that would have been repaid on a repayment mortgage is £10,000.

    Mr and Mrs C are £1,000 better off on capital.

    The total payments to date on their endowment mortgage are £30,000.

    The total payments to date on a repayment mortgage would have been £28,000.

    Mr and Mrs C are £2,000 worse off on outgoings.

    They are £1,000 worse off overall.
  • Borrowers worse off on capital and worse off on outgoings. They have lost the total of the capital loss and the outgoings loss.

    For example

    Mr and Mrs D's endowment policy has a surrender value of £10,000.

    The capital that would have been repaid on a repayment mortgage is £11,000.

    Mr and Mrs D are £1,000 worse off on capital.

    The total payments to date on their endowment mortgage are £30,000.

    The total payments to date on a repayment mortgage would have been £29,000.

    Mr and Mrs D are £1,000 worse off on outgoings.

    They are £2,000 worse off overall.
  • Borrowers worse off on capital and better off on outgoings, and the loss on capital is more than the gain on outgoings. The borrowers have suffered the capital loss. The outgoings gain is deducted only if the borrowers are of sufficient means.

    For example

    Mr and Mrs E's endowment policy has a surrender value of £10,000.

    The capital that would have been repaid on a repayment mortgage is £12,000.

    Mr and Mrs E are £2,000 worse off on capital. The total payments to date on their endowment mortgage are £30,000.

    The total payments to date on a repayment mortgage would have been £31,000.

    Mr and Mrs E are £1,000 better off on outgoings.

    Ordinarily, they would be treated as having incurred a loss of £2,000.

    Exceptionally, if they were of sufficient means, they would be treated as having incurred a net loss of between £1,000 and £2,000, depending on how much of the past savings it would be reasonable to take into account.
  • Borrowers worse off on capital and better off on outgoings, and the loss on capital is less than the gain on outgoings. The borrowers have suffered the capital loss. The outgoings gain is deducted only if the borrowers are of sufficient means.

    For example

    Mr and Mrs F's endowment policy has a surrender value of £10,000.

    The capital that would have been repaid on a repayment mortgage is £11,000.

    Mr and Mrs F are £1,000 worse off on capital.

    The total payments to date on their endowment mortgage are £30,000.

    The total payments to date on a repayment mortgage would have been £32,000.

    Mr and Mrs F are £2,000 better off on outgoings.

    Ordinarily, they would be treated as having incurred a loss of £1,000.

    Exceptionally, if they were of sufficient means, they would be treated as having incurred either a loss or a net gain - ranging from a £1,000 loss to a £1,000 gain, depending on how much of the past savings it would be reasonable to take into account.

Where the borrowers have incurred a loss, and the firm was at fault, compensation would comprise the total of:

  • the amount of the loss; and
  • the cost of swapping to a repayment mortgage (assumed to be £250 unless some other figure is demonstrated); and
  • any appropriate amount for inconvenience.
David Thomas

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.