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ombudsman news

issue 20

September 2002

the regulator's guidance on the treatment of policy enhancements as a result of windfall benefits

In the February 2002 issue of ombudsman news, we explained how we approach any windfall benefits when we calculate compensation in mortgage endowment cases. This followed the High Court decision in the case of Needler Financial Services v Taber and the publication of the Financial Services Authority's (FSA's) Regulatory Update 94.

We said that, during the consultation on that regulatory guidance, we would follow the principles established in the Taber case when we dealt with relevant cases. We were concerned to ensure that the delay while the consultation took place did not:

  • prevent customers whose complaints had been upheld from receiving the compensation they were due; or
  • mean that these customers continued to be locked into an inappropriate product that had been mis-sold to them.

This was particularly important because the result of the consultation would, in any event, have only a minor effect on any compensation payable.

In the light of this, some firms chose to ignore windfalls when they calculated redress, and/or to deduct the value of any policy enhancements or augmentations from the value of the investment before they calculated compensation. Some firms took account of windfalls but promised to review their calculations when the final regulatory guidance was issued.

As the FSA has now published the guidance (in its Consultation Paper 126), firms can go ahead and finalise any unresolved pension review cases that involve windfalls. The treatment that we currently apply to these cases is in line with the treatment set out in the guidance.

In essence, the guidance confirms that windfall benefits should not normally be taken into account when working out the compensation due to a customer who has been "mis-sold" a product. So firms should use the principles established in the Taber case to work out whether a benefit from a corporate event is a windfall benefit.

The FSA's Complaints Sourcebook defines a windfall benefit as follows:

DISP 2.5.14 G A windfall benefit arises where:

  • there has been a demutualisation, distribution or reattribution of the inherited estate, or other extraordinary corporate event in a long-term insurer; and
  • the event gave rise to "relevant benefits" as defined in DISP App 2.5.15G.

"Relevant benefits" are those that fall outside what is required in order that policyholders' reasonable expectations at the point of sale can be fulfilled.

The guidance also states (in paragraph 2.15.16G) that windfall benefits include free shares or cash given to customers when a firm demutualises, plus any bonuses and policy top-ups given to customers to encourage them to agree to a re-attribution or distribution of an inherited estate.

There is a rare situation where a windfall benefit should be taken into account. That is where the firm expressly recommended and sold a product to a customer on the basis that the customer would receive a windfall benefit, or would be likely to do so. However, in dealing with compensation for such cases, the firm will need to be able to produce documents from the time of the sale that show this was the situation.

We now expect firms to review all cases where they have said they would make good any windfall benefits that they took into account when they calculated compensation. This applies whether these cases were referred to the Personal Investment Authority (PIA) Ombudsman Bureau or to the Financial Ombudsman Service. Firms should then make any appropriate payments without delay. Those firms that did not take windfall benefits into account need take no further action.

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.