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ombudsman news

issue 44

March 2005

attitude to risk in mortgage endowment cases

When assessing a complaint and looking at whether the customer was given suitable advice to take out an investment product, it is important to take into account the customer’s overall circumstances at the time of sale and not to rely solely on one piece of evidence.

This is particularly the case when considering complaints about the sale of mortgage endowment policies, where a box will have been ticked on the "fact find" (a document completed at the time of the sale) to note the customer’s attitude to risk. The information provided in the "fact find" can often be a helpful indication of what the customer’s attitude to risk might have been. However, as the following case studies illustrate, it should not always be assumed that the recommended policy was suitable for the customer simply because the level of risk represented by the policy appears to match the customer’s attitude to risk, as noted on the "fact find".

case studies

attitude to risk in mortgage endowment cases

44/13
mortgage endowment policy – whether policy mis-sold – attitude to risk as indicated on "fact find" did not appear to have been appropriate or reliable

Mr and Mrs A were very distressed when they found there was a high risk that their endowment policy would not produce enough – when it matured – to pay off their mortgage, particularly since Mr A had already retired.

The firm that had advised them said that the couple had no grounds for complaint. It said the policy had been suitable for the couple’s needs and matched their attitude to risk – as indicated on the "fact find". The couple then brought their complaint to us, claiming that the firm had never made them aware of the risks associated with the policy.

complaint upheld
Mr and Mrs A had approached the firm for a mortgage in order to take advantage of their council’s "right to buy" scheme. The firm advised them to take a unit-linked mortgage endowment policy with a 15-year term. It said the advantages this offered were that it:

  • would provide a fixed term for the mortgage (even if the couple moved house);
  • offered the possibility of a cash surplus; and
  • provided the couple with life cover.

The "fact find" completed at the time showed that Mr A was 52 years old and had worked as a security guard for the past 9 years. He was a member of his employer’s pension scheme and earned £9,000 per year. He expected to retire at 65 – 2 years and 7 months before the recommended policy matured.

His wife was 49 at the time and worked as a part-time sales assistant earning £3,000 per year. She expected to retire at 60 and did not have any pension arrangements.

This was the couple’s first mortgage and they had no savings and investments. The firm’s "fact find" offered a choice of three boxes to indicate attitude to risk –"cautious", "balanced" and "adventurous". In this case, the box marked "balanced" had been ticked.

When we contacted the firm, it insisted that its advice had been "suitable for someone with a balanced attitude to risk – like Mr and Mrs A".

We looked at the overall circumstances of the case. The mortgage continued to run after both Mr and Mrs A had retired. The adviser had discussed with the couple whether they would still be able to afford the mortgage payments after they stopped work. However, he did not appear to have explained the possibility of a shortfall, or considered how the couple would deal with such a situation, should it arise. They had no savings or investments and their pension provision was modest.

Having looked at Mr and Mrs A’s overall needs and circumstances, we concluded that although the "fact find" indicated that the couple had a "balanced" attitude to risk, this was not likely to have been an appropriate or reliable assessment of the risks that the couple were prepared to take, or in a position to take. We upheld the complaint. But we did not consider Mr and Mrs A could have afforded the alternative of a repayment mortgage over a shorter term.

We asked the firm to pay redress in accordance with the FSA’s guidance, in order to put the couple in the position they would have been if they had taken out a repayment mortgage over the 15 year-term. We also asked the firm to add a modest sum for the distress and inconvenience caused to Mr and Mrs A, who were already retired and faced the prospect of a significant shortfall on their policy.

44/14
mortgage endowment policy – mis-selling – no evidence in "fact find" to justify firm’s assessment of customer’s attitude to risk

Mrs N complained to the firm, saying it had wrongly advised her to take out a 20-year unit-linked mortgage endowment policy that was invested in the firm’s managed fund.

She said the adviser had not mentioned the possibility that the policy might not provide enough funds, when it matured, to enable her pay off her mortgage. She also complained that the adviser had not discussed any other types of mortgage with her but had told her she was "not eligible" for a repayment mortgage.

The firm rejected Mrs N’s complaint. It said that the level of risk represented by her mortgage endowment policy "matched" the level of risk that the ticked box on the "fact find" suggested she was prepared to accept. It added that Mrs N had been willing to accept this level of risk as she wished to benefit from the potentially higher returns available with unit-linked investments.

complaint upheld
The "fact find" completed by the firm at the time of the sale indicated that Mrs N’s "attitude to investment risk" was a "3" on a scale of 1-5. However, we saw nothing in the "fact find" to justify that rating.

Mrs N had no savings, investments or pension provision. She was 40 years of age at the time and her only income was the £10,200 per year she received in benefits for looking after her mentally ill son and sick mother.

The firm was unable to produce any evidence to back up its view that that Mrs N understood and had been prepared to accept the risks associated with the policy.

Her financial position was precarious. She had no savings to use if there was a shortfall in the policy and her income was made up of benefits that would decrease in future, on the death of her mother.

We were satisfied that Mrs N could have taken out a repayment mortgage and – if suitably advised – would have done so. We told the firm to pay compensation calculated in accordance with the FSA’s standard guidance.

Walter Merricks, chief ombudsman

ombudsman news issue 44 [PDF format]

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.