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annual review of 1 April 2001 to 31 March 2002 overview of complaint trends

mortgage endowment complaints

In the year ended 31 March 2002, we received 14,595 complaints about endowment policies linked to mortgages - an increase of 60% on the previous year. For a second year, these complaints accounted for around half of all the new investment-related complaints we received.

Around Spring 2002, it began to look as though the volume of mortgage endowment complaints had passed its peak, with new complaints falling to around a third of cases. However, at the time of writing this report we are now expecting an increase - in response to the second round of ‘re-projection’ letters that life insurance companies are sending to their customers.

For the year as a whole, around 40% of the mortgage endowment complaints we saw involved inappropriate action by firms. During the year, the FSA issued guidance on the calculation of redress (Regulatory Update 89) and we published on our website our mortgage endowment complaints assessment guide. This guide provided firms with a better understanding of our approach and procedures, enabling them to settle more cases in an appropriate way without our direct involvement. So we now expect to see a smaller proportion of cases coming to us where firms have acted inappropriately.

Our prime concern has been to ensure that, if a mortgage endowment policy is found to be unsuitable, the policyholder is able to switch to a capital repayment mortgage as soon as possible.

During the year, the courts considered the treatment of ‘windfall’ payments. This led to a ruling that these payments should be disregarded when calculating compensation. The FSA subsequently consulted on the correct treatment of policy enhancements - for example, additions to policies that arose as a result of a demutualisation. While this consultation has been continuing, we have been able to ensure that policyholders receive - ‘upfront’ - at least the majority of any compensation due to them. This means they can arrange a repayment mortgage for the balance of their mortgage loan, with any additional compensation payable later this summer (2002) after final guidance is issued.

personal pension complaints

We received 5,881 complaints about personal pension plans, an increase of 75% on the previous year. This continues to be the second largest area of complaint and accounts for 14% of all complaints received by the ombudsman service.

Many of the complaints relate to cases covered by the FSA’s Pensions Review, which is due to be concluded by 30 June 2002. We are expecting a further increase in complaints in 2002/03, arising from cases at the end of the Review.

This year also saw the start of stakeholder pensions. We have agreed with the Pensions Ombudsman that, following a change to the subordinate legislation under the 1993 Pensions Act, pension complaints will be dealt with as follows:

  • Where the complaint concerns the circumstances of the sale of the pension, we will handle the matter. But where it relates to the management or administration of the pension scheme, the Pensions Ombudsman will deal with the complaint.
  • Where the Pensions Ombudsman is handling a complaint containing elements that we ought to handle, the complaint will be transferred to us.

This agreement applies equally to personal pension arrangements and small occupational schemes, where we receive a relatively small - though increasing - number of complaints about Executive Pension Plans and Self-Administered Pension Plans.

Equitable Life

We have received over 1,400 complaints about Equitable Life since the House of Lords’ decision in December 2000 relating to Guaranteed Annuity Rate (GAR) policies. Most complaints have been from policyholders who believe they were not adequately informed of the consequences of Equitable Life losing the appeal to the House of Lords.

A compromise scheme - put forward by Equitable Life - was proposed and accepted in a vote by policyholders. After the High Court endorsed this scheme in February 2002, policies were enhanced in accordance with the scheme’s proposals. We cannot consider complaints from policyholders who are covered by the compromise scheme, and we have informed the small proportion of policyholders who are in this position.

We have been in regular contact with the Equitable policyholders who have complained to us. Since February 2002 we have been seeking details from policyholders and Equitable Life, so that we can categorise the complaints. This will enable us to examine ‘lead’ cases for each category of complaint, with a view to applying the outcome - once established - to all other complaints in the same category. However, we have reassured individual policyholders that they will still have the opportunity to comment on the appropriateness of any view applied to their case, before it is formally determined. This means that any particular facts and circumstances relating to their case will be considered before the ombudsman makes a final decision.

complaints about ‘dual’ variable mortgage rates

The hottest banking topic of the year was ‘dual’ variable mortgage rates. Some mortgage lenders moved from having a single variable mortgage interest rate to having two variable mortgage interest rates - one higher than the other.

We received a substantial number of cases from capped-rate and discount-rate borrowers who had taken out their mortgages before the change - and who challenged their lender’s contention that they were linked to the higher of the new rates, rather than the lower one.

By 31 March 2002 we had issued ombudsman final decisions in three ‘lead’ cases, involving three different lenders. In each of these cases we decided that the particular borrowers’ mortgage contracts entitled them to be linked to the lower of the new rates.

Our decisions in these cases did not mark any change in approach from that of predecessor ombudsman schemes. They did not outlaw lenders having more than one variable mortgage rate. They did not interfere with lenders’ freedom to set rates for their products. The decisions did say what rate should be used as a yardstick, in the circumstances of those particular cases, in order to fulfil the contractual promises the lenders had previously made to those particular borrowers.

Although each decision related to individual borrowers and individual circumstances, considerable interest was generated when the parties communicated the decisions to the press - and media commentators suggested that the lenders should automatically treat other borrowers in a similar way.

One of the lenders concerned decided to do that, regardless of whether the borrowers had complained. The other two settled with the borrowers who had complained - though we later received further cases about the settlement terms that one of these lenders offered. We are considering those cases, along with further cases involving other lenders. A fuller summary of the position to date, including the basis on which the three ‘lead’ cases were decided, can be found in the March 2002 edition of ombudsman news.

complaints about other mortgage issues

Even without the ‘dual’ variable mortgage rate cases, mortgages would have produced the largest proportion of banking complaints this year. As in previous years, we continued to receive a significant number of cases about early repayment charges on fixed-rate and discount-rate mortgages.

Fixed-rate mortgages give borrowers the benefit of knowing there is no risk that their payments will rise if general interest rates increase. But there is almost always an early repayment charge to pay if the borrower wants to end the fixed-rate deal early. This is because many lenders fund fixed-rate mortgages by borrowing at fixed rates in the money market. If the lender has to break its money-market deal, it may have to compensate the institution it borrowed from.

Discount-rate mortgages give borrowers a temporary reduction in cost, after which they revert to the normal rate. But there is often an early repayment charge to pay if the borrower wants to end the deal before they have paid the normal rate for some specified time. This is because the discount has to be paid for. The lender gives the discount in order to attract the business, on the basis that at least some of it will be repaid gradually once the mortgage reverts to the normal rate.

When general interest rates fall, some fixed-rate borrowers want to break the fixed rate without paying the early repayment charge. At the end of the discount period, some discount-rate borrowers do not want to go on to the normal rate or pay the early repayment charge. They complain they did not know of the charge, or that it was unfair.

We consider whether the details of the early repayment charge were made sufficiently clear and were adequately brought to the borrowers’ attention when they entered into the deal. We also consider whether the charge was structured in a way that was likely to operate fairly or unfairly.

It is not the case, as some borrowers believe, that the lender must be able to show that the charge is exactly equal to the lender’s loss. That is a complex formula - which might involve drafting an early repayment charge clause that no ordinary borrower could understand. What is needed is something that is clear and not out of all proportion to the lender’s prospective loss.

complaints about interest paid on TESSAs

Complaints about the rates of interest paid on TESSAs (Tax Exempt Special Savings Accounts) - the hottest banking topic in our 2000/01 year - formed a significant proportion of the cases we closed in 2001/02. These cases involved complaints that some firms paid lower rates on their TESSAs than they did on their ISAs (Individual Savings Accounts). The Banking Ombudsman Scheme and the Building Societies Ombudsman Scheme issued a briefing note in September 2000, indicating the approach that the ombudsman was likely to take on such complaints that reached the ombudsman service - including the approach to the relevant principles of the Banking Code. Banks took note of this. Some decided they would probably ‘lose’ and settled individual complaints with their customers. Others decided they were likely to ‘win’. By and large they proved to be right.

Most building societies preferred a formal ombudsman investigation. Some ‘won’ and some ‘lost’. Two of those that lost had said they would take court action if the ombudsman’s decision went against them. One of these societies, after studying the final decision in its case, decided to accept it after all. It continued to disagree with the ombudsman’s view, but settled all its other cases in line with the ombudsman’s decision. The other society asked for the ombudsman’s decision to be referred to the High Court because, it said, the decision contained errors of law. That case is unlikely to be heard until late 2002.

complaints about other savings/deposit accounts

Savings/deposit accounts ranked third in the year (after mortgages and current accounts) as a source of banking complaints. But while current account complaints involved a wide variety of issues, savings/deposit account complaints almost always centred on the fact that the rate of interest had been downgraded or was otherwise unfair.

For postal accounts, which cannot be operated at a branch, the Banking Code requires the firm to send the customer individual notice of an interest rate reduction. But for ordinary accounts that can be operated at a branch, the Banking Code says it is enough if firms put notices in branches and in newspapers - though there is additional protection for accounts that are no longer open or promoted (superseded accounts).

Based on the cases we see, we think the distinction between postal and branch-based accounts is outmoded. We hope a change will emerge from the current review of the Banking Code. Following an independent committee’s report to HM Treasury, the review process now involves an independent reviewer. The views we put to her are set out in the March 2002 issue of ombudsman news.

motor insurance complaints

Complaints about motor insurance have seen a welcome decline of 19% during the year. Firms are now used to our approach on most issues arising out of motor insurance disputes and have sought to minimise the number of cases referred to us unnecessarily. We have also attempted to identify - at the earliest stage of our procedure - those potential motor insurance complaints which have only arisen as a result of misunderstandings about standard insurance practice, for example involving vehicle valuations.

Disputes involving ‘keys in cars’ form the main issue we have dealt with during the year. In these cases, policyholders find that their claims in relation to a stolen car are rejected if they left the keys in the vehicle. We have needed to consider these cases carefully following a Court of Appeal case at the beginning of 2001. If we think the consumer was sufficiently close to the car to be able to intervene and had not ‘left’ the car, we will generally require the firm to meet the claim. However, where we consider that the consumer had not been this close, we will generally support the insurer. Inevitably this has required some fine judgements about the facts of each case. We are working with firms to ensure they understand our approach.

complaints about building and contents insurance

One positive feature of the year was the low level of complaints we received following the widespread flooding in 2000. Inevitably, flood-related cases are distressing for policyholders (particularly where their property is subject to multiple floods) and the necessary work of drying-out and refurbishment can take a considerable time. In general, firms seemed to respond well to the challenges of these claims. In the cases we have seen where insurers fell below standard, the main problem was usually related to the difficulties of co-ordinating the work of the various contractors.

travel insurance complaints

There was a marked increase - by 14% - in travel insurance complaints referred to us during the year. We saw increases in all types of dispute, including baggage and medical expenses cover. Particular problems arose from the extended sales chains often associated with travel policies, and the increasingly common approach of ‘badging’ the insurance product under the name of a High Street travel agent or retailer. Normally we will treat the insurer as responsible for the advice given at the point of sale.

Establishing what was actually said and agreed between a customer and a firm in travel insurance disputes can be critical to the outcome of the dispute. Increasingly, many important discussions - including, for example, disclosure of pre-existing medical conditions - are handled over the telephone. Obviously this is convenient for both the firm and the customer. But we have reminded firms that we may not be able to uphold their decisions unless they can provide phone recordings to support their version of events.

medical-related and other insurance disputes

During the year we dealt with over 1,000 cases relating to critical illness, medical expenses and permanent health insurance. These medical-related policies provide a particular challenge in assessing conflicting medical opinions and dealing with personal and often distressing circumstances. These policies - and our handling of disputes about them - need to keep up to date with relevant medical advances.

Policyholders often have high expectations of the cover provided and, in the case of medical expenses policies, of the treatment they will receive. Making clear at the outset the limitations of these policies, as well as their advantages, would help to minimise scope for dispute when claims arise. This also applies to loan protection cover - a relatively small but significant part of our caseload. We also handle complaints about many other types of general insurance, including policies covering pets, dental treatment, legal expenses, marine insurance and electrical, motor and furniture warranties.

complaints about stockbrokers and fund managers

Firms previously regulated by the Securities and Futures Authority (SFA) saw the greatest changes in complaints-handling procedures at ‘N2’ (1 December 2001 - the date the new rules came into force under the Financial Services and Markets Act) when their customers could complain to an ombudsman scheme for the first time.

What has not changed, however, is that we cannot deal with complaints about investment performance. Given recent stock market movements, surprisingly we have not seen an increase in performance-related complaints this year. Where these complaints appear to involve wider concerns - for example, the suitability of the product, based on the investor’s attitude to risk - then we may be able to look into them.

We also investigate complaints about administrative errors and delay by stockbrokers and fund managers, especially where consumers have required investment by a specific date to obtain tax benefits.

During the year, we received a significant number of complaints about ‘packaged’ investment products - over 1,000 PEP complaints and more than 300 complaints each in relation to single premium investment bonds, unit trusts and non-cash ISAs. Before ‘N2’, these products could be regulated by different regulators with different complaints-handling arrangements. Now, complaints about all regulated products are handled by the Financial Ombudsman Service.

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