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annual review 1 April 2003 to 31 March 2004 - overview of complaint trends

Given the very wide-ranging nature of the complaints we handle - from pet insurance to spread-betting - we have not included individual case studies in this annual review. The limited space in this publication means we could not give a fair and representative overview of all aspects of our work.

However, we include case studies in our regular newsletter, ombudsman news, which gives regular feedback on changing complaint trends, as well as commentary and briefing on our approach to different types of complaint. We hope that firms find ombudsman news a helpful source of reference - and that they will take its contents into account when considering how to handle complaints. To join the ombudsman news mailing list, please contact our communications team (phone 020 7964 0092). All issues of ombudsman news are also available online on our website.

This chapter gives an overview of the main areas of our complaints work - and covers the key developments in the year, relating to the types of complaint that we deal with most frequently.

mortgage endowment complaints

  • other investment-related complaints = 33%
  • mortgage endowment complaints = 67%

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Inevitably the major feature of the year was the practical challenge of dealing with the unprecedented inflow of new mortgage endowment complaints. In his report, the chief ombudsman describes the operational impact of dealing with the near four-fold increase in these complaints.

Most customers who complain to us about their endowment mortgage say they were under the impression that the policy was certain to provide sufficient funds to settle their mortgage at the end of the planned term. Some customers remain dissatisfied even where the firm has offered them a settlement in accordance with regulatory guidance issued by the Financial Services Authority (FSA) - often referred to as ‘RU89’. The customer feels that the firm should abide by its ‘guarantee’.

In general, however, we do not find many cases where there is clear evidence that a guarantee was given. We gave one example in issue 30 of ombudsman news (August 2003). In other cases, we give customers reassurance that the offer made by the firm is fair. Increasingly, we are able to do this without formally taking on the case.

In December 2003, the Financial Ombudsman Service and the FSA hosted a mortgage endowment forum to discuss issues and concerns with representatives of consumer and industry bodies. A major part of our discussions focused on reports that some firms were refusing to investigate complaints about mortgage endowment policies that had been sold more than 15 years before the consumer first complained. The FSA confirmed that the ‘15-year rule’ relates to action taken in the courts. It does not prevent the ombudsman from considering complaints about events that took place over 15 years ago. The FSA stressed that the complaint-handling rules do not permit any firm to refuse to investigate complaints, and it confirmed that it would be contacting those firms that had cited the ‘15-year rule’ as a reason to reject complaints.

Some firms had expressed concern that, in a number of instances, full records of a sale may no longer exist. We acknowledged at the endowment forum that both sides could have limited documentary evidence about a disputed sale. We explained that this was why our consideration of these cases turned on whether an endowment policy was suitable for the consumer involved at the time the policy was sold - based on information that could reasonably have been established at that time. We do not base our view on what consumers now think of that sale, or on their current circumstances or what they could now afford.

During the year we also had several discussions with firms about more general issues associated with the handling of so-called pre-‘A Day’ cases - complaints about mortgage endowments sold before the Financial Services Act 1986 came into force in 1988. Although sales at that time were not subject to regulation, there were legal responsibilities on those conducting sales. We have continued to point firms to issue 14 of ombudsman news (February 2002), where we set out our basic approach to this type of mortgage endowment complaint.

single-premium investment bonds

  • complaints about single-premium investment bonds = 9%
  • other investment-related complaints = 91%

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Of the 7,222 complaints we received this year about single-premium investment bonds, the vast majority involved bonds that were linked to stock market performance and promised high income. These high-income bonds are sometimes technically called ‘structured capital at risk’ products (or ‘SCARPS’) - but they are generally referred to as ‘precipice bonds’.

This year saw a significant increase in the number of consumers complaining that they had been mis-sold ‘precipice bonds’. The complaints relate to bonds bought following face-to-face meetings with advisers, or as a result of general mail-shots, direct advertising or personalised letters. The complaints are generally that the level of risk attached to the bonds was higher than the consumers say they initially agreed and understood - and that this higher risk only became apparent when the bonds matured, revealing a substantial loss, or when annual statements indicated likely losses.

We do not uphold complaints simply because the consumer has made a loss on an investment. However, it is often the prospect of a large and unexpected loss that raises the consumer’s awareness of a potential mis-sale.

Where the investment was not bought following a face-to-face meeting with a financial adviser, we have to decide whether the consumer could reasonably believe that advice had been given to them. If we find that this was so, we then have to consider whether the firm advised the consumer to invest in a product that was appropriate for their particular needs and requirements.

Firms have to disclose the details of any investment they recommend - but full disclosure of product details does not automatically mean that the bond recommended was a suitable investment for a particular investor. If advice was given, the adviser had to ensure that the investor’s attitude to risk was properly assessed and not simply recorded as matching the risk rating attached to the product.

‘Precipice bonds’ are complex financial products - with returns linked to the performance of particular shares or stock market indices - and they are not easy for the layman to understand. Financial advisers should therefore have used their skills and knowledge to assess properly the risk attached to the bonds. The ombudsman needs to be satisfied that the consumer’s willingness to accept the level of risk was properly and reasonably assessed, to ensure they were sold a suitable investment.

Where we have upheld complaints involving ‘precipice bonds’, we have usually done so for one of two reasons. Either, the adviser failed to establish that the consumer’s particular requirements and circumstances supported taking significant risks with the capital invested. Or, the adviser was over-optimistic about future market performance, which led to an understatement of the true level of risk that is always attached to a short-term, equity-based investment.

personal pension complaints

  • personal pension complaints = 7%
  • other investment-related complaints = 93%

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Complaints about personal pensions continue to form one of the largest areas of complaint to the Financial Ombudsman Service - although the number of complaints in this category fell by a quarter this year.

As with other investment-based complaints that we receive, the trigger that prompts concern that a personal pension may have been mis-sold is generally when consumers receive a valuation statement - or when there is a drop in the amount of income received. Such events can be the first indication the consumers get that a degree of financial risk was involved - so their concerns cannot be dismissed simply as complaints about disappointing performance.

In considering these complaints, we look at whether, when giving advice, the adviser paid sufficient attention to their client’s circumstances and objectives. The consumer might have received the advice when they first bought the policy, or at a later date when, for example, they were considering buying an annuity, or taking a cash withdrawal from an income draw-down policy.

Income draw-down policies were introduced in 1995, so have now been in existence for long enough for a small but steady stream of complaints about mis-selling to reach us. When we look at whether advice to invest in one of these policies was suitable, we take into account the level of income that the consumer would need, in order to meet their normal living expenses and maintain a minimum standard of living. In some cases, depending on the potential fund size, this leads us to conclude that the consumer could not afford to take the risk associated with this type of policy. Features such as the availability of cash withdrawal - and the fact that the balance of the fund can be preserved for potential beneficiaries to the policyholder’s estate - do not automatically make a draw-down policy a suitable investment.


By 31 March 2004, we had received around 4,800 complaints in total, involving split capital investment trusts and zero dividend preference shares - 'splits' and 'zeros'.

About half of the these complaints are against the sponsors of particular 'splits' companies. Some of these complaints are outside our jurisdiction because, in the circumstances of the particular cases, there was no customer relationship between the complainant and the 'splits' company sponsor.

Where the complaints are within our jurisdiction, we have put them into groups according to the circumstances and the 'splits' company sponsor involved. We are pursuing one or more ‘lead’ cases for each of these groups. Large amounts are at stake and the cases are hard fought. They will take some time to resolve.

Meanwhile, the FSA is pursuing its own investigations into the allegation that there was collusion among ''splits' company sponsors. That might or might not lead to some compensation arrangements for particular classes of investors. Meanwhile, and with the agreement of the FSA, we are pressing on with the cases we have in hand.

The other half of the ‘splits’-related complaints are against intermediaries - ranging from independent financial advisers to portfolio managers. Our decisions in these cases must be based on what the firm should have done in the light of the information available to it at the time it provided the service to its customer.

These cases throw up complexities for the ombudsman service beyond those raised by the complicated nature of 'splits' themselves. This is because many cases involve a combination of issues that are specific to the individual case, as well as issues that are specific to the individual 'splits.

Case-specific issues are ones that can only be investigated and assessed in the circumstances of each individual case. They include the risk profile of the complainant - and, in portfolio management cases, the agreed profile for the managed portfolio.

'Splits'-specific issues are ones that can only be investigated and assessed collectively, to ensure a consistent outcome between one case and another involving the same 'split' at the same period. They include the actual risk profile of the different types of shares in each of the 'splits', and the extent to which information about this was available to financial firms.

The conclusions on 'splits'-specific issues can vary over time, for a combination of reasons. First - the actual risk profile of the different types of shares in each 'split' can vary over time. Second - the extent of the information available to financial firms can vary over time. Third - the extent of the information available at a particular date can also differ depending on the role fulfilled by the financial firm. So, for example, at a particular date information may be available to a firm that acts also as a 'splits' investment manager, but not to a firm that acts as an intermediary.

Any 'splits'-specific information that we identify when considering individual cases is then fed into the collective investigation and assessment. And the 'splits'-specific conclusions that we come to have to be fed back to inform the outcomes of the individual cases.

That would be complicated enough even if each individual case involved a service provided on a single date for a single type of share in one 'split'. But, for example, portfolio management is a continuing service provided over a period of time. And each portfolio may contain a number of ‘splits’ shares of different types or in different ‘splits’ companies - or both of these.

So the management of the two-way flow of information between the case-specific issues and the ‘splits’ specific issues is an extremely complex task - which is over and above the complex issues raised by the investigation and assessment of the case-specific issues and the ‘splits’-specific issues themselves.

We are pressing on with our work as fast as we can, consistent with due process and a realistic use of resources. Of course, the time all this is taking is unwelcome to the consumers who have brought complaints to us, but we are doing our best to keep them informed of what is happening.

complaints about mortgage loans

  • complaints about mortgage loans = 33%
  • other banking-related complaints = 67%

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In last year’s review we described a surge of complaints about dual-variable mortgage rates. This has now dried up. As in earlier years, the largest group of mortgage complaints during the year has related to early repayment charges linked to special rates (fixed or discounted). However, we are receiving fewer of these complaints now that there are fewer ‘overhanging’ early repayment charges (which lock the borrower into the standard variable rate for a period after the special rate has expired).

Other typical mortgage complaints include ones where the lender has given the borrower the wrong repayment figure - so that the borrower ends up owing more than expected - or where the mortgage term has changed in a way the borrower did not expect when taking out a further advance.

Although the number involved has not been great, we have begun to see complaints this year about so-called ‘shared-appreciation’ mortgages. With these mortgages, the lender had agreed to charge no interest (or low interest) in return for a share in the increase in value of the property.

Property values shot up faster than either lenders or borrowers had expected. Borrowers complained that lenders made extra profit, while lenders said they had securitised the mortgages and the extra profit had not gone to them. In most cases, we did not uphold the complaints - because the documents were extremely clear and had been fully explained to the borrowers, usually by their own solicitors.

complaints about other loans

  • complaints about loans other than mortgages = 11%
  • other banking-related complaints = 89%

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Loan complaints come from both ends of the spectrum. For every complaint we get that the lender should not have provided the loan because of the borrower’s circumstances, we get another that a lender has refused a loan because of the borrower’s circumstances. We do not interfere with the lender’s commercial judgement if it is exercised legitimately.

During the year we have, however, seen a small but worrying number of cases where customers had a series of consolidation loans. An overdraft was turned into a loan account. The overdraft crept up again. A new, larger loan account was created to repay the original loan plus the new overdraft - and so on. Not surprisingly, some of these customers get into arrears and financial difficulties. Some lenders treat their borrowers sympathetically, as the Banking Code requires - others do not.

Most loan complaints are from personal customers. But some are from small businesses, often relating to complex financial products with significant early repayment charges. The clarity of the documentation provided by different lenders is extremely variable.

credit card complaints

  • credit card complaints = 15%
  • other banking-related complaints = 85%

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Despite media concerns about ‘identity theft’, we have so far seen few cases of this - in relation either to credit cards or other banking products. Where these problems arise, the firms concerned presumably resolve them to the consumers’ satisfaction, so that the cases are not brought to the ombudsman service as unresolved disputes.

However, we are now seeing a significant number of cases involving what card issuers claim is ‘first party’ fraud - where the card holder colludes in an arrangement to defraud the financial firm that issued the credit card.

We still await a High Court decision on whether section 75 of the Consumer Credit Act 1974 - which makes the card issuer jointly liable with the supplier of the goods/services, without limit - applies to transactions abroad. Meanwhile, we continue to apply across the board the good banking practice employed by most firms of accepting liability for transactions abroad up to the amount of the credit provided.

complaints about savings and deposit accounts

  • complaints about savings and deposit accounts = 8%
  • other banking-related complaints = 92%

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The vast majority of disputes about savings and deposit accounts involve complaints that the rate of interest paid is unfair, often by comparison either with some other account provided by the same financial firm or with movement in general interest rates.

Some of the answers are to be found in the Banking Code. But the requirements have changed considerably over the years. So we have summarised them, and other issues relating to such complaints, in a new technical briefing note on our website.

The new edition of the Banking Code that came into effect in March 2003 contained significant improvements in this area. But we continue to believe it would be better if firms were to send personal notifications of interest rate changes, unless the account balance is below some agreed limit. We will continue to press for that in the next review of the Banking Code, which has just got underway.

motor insurance complaints

  • motor insurance complaints = 25%
  • other general insurance complaints = 75%

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This year saw another increase in the number of motor insurance complaints - up 15% on the previous year. Three topics dominated our work - motor valuations, repairs and the 'keys in car' exclusion.

Many motor insurance policies have a 'keys in car' exclusion - a clause that excludes from cover any claims for theft where the driver left the car unlocked with the keys in the ignition (or on the seat). In last year's annual review we referred to the problems that arise from this exclusion and we highlighted in ombudsman news our general approach to this issue. However, we continue to see complaints where insurers appear to us to have applied this exclusion without good reason.

Our approach to the valuing of written-off cars is also well known in the insurance industry - and was most recently set out in issue 22 of ombudsman news (November 2002). Yet we still receive complaints where - again for no good reason, as far as we can see - instead of following this approach, the insurer has offered the policyholder less than the relevant price suggested by the motor industry guides.

complaints about building and contents insurance

  • complaints about building and contents insurance = 25%
  • other general insurance complaints = 75%

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Under some policies, if repairs are needed in connection with a claim, the insurer appoints a repairer to carry out any necessary work. Disputes about the quality of repairs carried out in these circumstances are becoming a growing feature of the complaints we deal with involving building and contents insurance. They also feature regularly in motor insurance disputes.

Insurers’ marketing material often stresses the advantages to customers of having the insurer take care of arrangements for any repairs. The high standards and professional service that the repair firm appointed by the insurer will provide are emphasised. This can naturally lead to customers having high - and sometimes unrealistic - expectations. If insurers had an effective means of overseeing the quality of the repairers they appoint, then it seems to us that there would be far fewer complaints of this type.

With the increase in house prices, we have seen a steady increase in the number of disputes involving amounts in excess of £100,000 - the maximum amount, under our rules, that we can direct a firm to pay in redress. A major fire, or even significant subsidence work, can readily give rise to costs well in excess of this limit. The total number of these cases remains very small, as part of our overall caseload, and firms have generally responded positively in any cases where we have recommended that they should pay redress above this limit. We will, however, keep this matter under careful review.

medical-related insurance complaints

  • medical-related insurance complaints = 16%
  • other general insurance complaints = 84%

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This category of complaint includes disputes about medical expenses insurance, as well as those involving critical illness and permanent health/income-protection policies. Typically, these disputes involve our having to consider carefully the policyholder’s reported medical condition in the context of the policy terms. So, for example, we might need to determine whether someone is genuinely unable to carry out their occupation because of ill-health, or to decide whether a set of medical and other reports suggest that a policyholder has a valid claim under the ‘heart attack section’ of their critical illness policy.

The most common cause of medical-related insurance complaints other than individual medical issues is ‘non-disclosure’. If a customer does not disclose an illness or treatment when applying for insurance, the insurer may be justified in rejecting any claim. We have set out detailed guidance on our general approach to this issue in

. We have also contributed to the work being carried out by the Association of British Insurers (ABI) to help improve the quality of application forms for many of these policies.

travel insurance complaints

  • travel insurance complaints = 13%
  • other general insurance complaints = 87%

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Travel insurance complaints rose by a significant amount - a 33% rise compared with the previous year. A rise in numbers had, to some extent, been expected because of increased travel restrictions arising from terrorism and from SARS. In the event, however, most of the increase resulted from routine claims-related matters. In particular, much of our caseload focused on the long-standing issues of how insurers apply exclusion clauses relating to ‘pre-existing conditions’ - for example, in situations where the policyholder’s circumstances change between taking out the policy and actually travelling.

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