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ombudsman news

issue 41

November 2004

investment case studies

This selection illustrates some of the wide range of investment cases that we have dealt with recently.

mortgage endowment policy extends well beyond policyholder's retirement - complaint that policy was mis-sold

Mrs K was 57 years of age when, on the firm's advice, she took out a unit-linked mortgage endowment policy for a term of 19 years. Two years later her son, Mr K, complained to the firm on his mother's behalf. He said the firm had acted irresponsibly in selling Mrs K a policy that, even assuming it achieved the necessary level of performance, would not pay off the mortgage until she was 76.

Mr K insisted that his mother had not been made aware of any risk in taking out a mortgage endowment policy. He added that his mother had not been in the best of health when she was sold the policy, and had since had to give up work altogether because of a deterioration in her condition. And he questioned the mortgage figure of £28,000, quoted on the policy documents, saying that his mother had borrowed only half this amount. The firm rejected the complaint, so Mr K came to us.

complaint upheld
When we asked Mrs K why she had opted for a mortgage that would take her over 19 years to pay off, she said that this was the only way in which she could afford the repayments.

From the "fact find" completed by the firm's representative at the time of the sale, it appeared that Mrs K had confirmed that she would have no difficulty meeting the payments after she had retired. However, there was no mention of where the money would come from. We noted that the medical questionnaire on the proposal form had been fully completed and revealed no significant health problems.

The mortgage application form showed that Mrs K had indeed borrowed £28,000. This sum comprised a re-mortgage of £14,500 and a new loan of £13,500, which included £6,000 for home improvements.

We concluded that Mrs K had decided to raise a new long-term loan, despite her unsatisfactory financial circumstances and age, and that she had believed that she could afford the repayments.

However, there was no evidence that the firm's representative had raised with her the issue of investment risk. The unit-linked endowment policy that he recommended was not suitable for Mrs K's personal and financial circumstances or requirements. The firm agreed to pay redress for any financial loss that Mrs K had suffered as a result of its inappropriate advice. This was based on a comparison with a repayment mortgage for the same amount over the same term.

customer complains about advice he claims he was given in the course of telephone call to firm's customer service department

Mr O held a with-profits bond with the firm. He complained that when he had telephoned the firm - just days before it announced cuts in its final bonus rates - it had incorrectly advised him not to sell his bond and had assured him that its value would not fluctuate.

The firm rejected the complaint. It said that it had not provided Mr O with any form of advice when he telephoned. His call had been a routine one to its customer service department in order to obtain a current valuation. The firm also pointed out that bonus rates could - and did - vary, and that this fact had been made very clear to Mr O when he first took out the bond. Dissatisfied with the firm's response, Mr O came to us.

complaint rejected
In support of his complaint, Mr O sent us evidence in the form of a telephone bill. This showed that he had made a telephone call to the firm's customer service department, lasting around 10 minutes. He maintained that the length of the call "proved" that he had not called merely to obtain a valuation, but had also discussed the performance of his investment and had sought and received advice about whether to cash it in.

Unfortunately, the firm did not have any tape recordings of calls to its customer service department. However, it told us that there were no circumstances in which its customer services staff would have given advice; they were not trained or authorised to do this.

The firm admitted that 10 minutes was rather longer than normal for a call involving a routine valuation. However, it said it was not that unusual for calls to take so long. The data protection checks made at the beginning of each call to establish the investor's identity could take some while, particularly if the caller did not have some of the details, such as account numbers, immediately to hand. And it was quite common, after asking for a valuation, for callers to discuss routine matters - such as the updating of their contact details - or to ask about the procedure for selling their investment.

We concluded that, on the balance of probabilities, the firm had not given Mr O any investment advice in the course of his telephone conversation and we rejected his complaint.

mis-selling of mortgage endowment policy - no provision in "tick boxes" on "fact find" for customers with lower than "cautious" risk level

Mr and Mrs H complained to the firm when they discovered that their mortgage endowment policy was unlikely to produce enough, when it matured, to pay off their mortgage. They said that when they took out the mortgage nearly 14 years earlier, the adviser had not told them there was any element of risk. When the firm refused to uphold their complaint, they brought it to us.

complaint upheld
The "fact find" that the firm's adviser had completed at the time of the sale recorded the couple's attitude to risk as "cautious". This seemed to match the level of risk represented by the with-profits.

However, unlike most "fact find" documents, this one had not provided a full range of risk options. There were a series of boxes on the form, representing different levels of risk, and customers were asked to tick the box that matched their attitude to investment risk. There was no box for customers who were not prepared to take any risk at all with their money. So we thought it possible that the couple had ticked the box that indicated their attitude to risk was "cautious", simply because this was the lowest risk category available.

To try to get a clearer picture of the couple's attitude to risk, we therefore needed to try and find out more about their circumstances at the time of the sale. We found no reason to suppose that either of them had any particular knowledge or experience of financial matters when they took out the mortgage. Although both were in full-time employment, their earnings were quite modest and they had no savings. They had no form of investment other than Mr H's holdings in his employer's "share save" scheme. However, we considered this to carry minimal - if any - risk since, if they wished, employees could sell back any shares allocated to them as soon as they received them.

We concluded that the couple would not have wanted to take any risks, when they took out a mortgage, and we upheld their complaint.

customer asks firm to re-instate existing pension policy - it sets up new policy instead, without his authority

Mr D believed that he had reinstated an existing pension policy that allowed him to vary the level of his regular payments and to make additional payments from time to time. However, when he attempted to make a one-off additional payment of £380, the firm told him that this was not possible.

When he contacted the firm about this, he discovered that it had not reinstated his existing policy, as it had agreed to do, but had sold him a completely new policy. The firm did not accept his complaint that he had not given it permission to do this, so he came to us.

complaint upheld
It was clear from the paperwork that the firm sent us that Mr D had asked the firm's representative to arrange for his existing pension policy to be re-instated. An internal memo from the firm to its representative explained that, for various reasons, the policy could not be re-instated and a new policy would have to be set up. There was no authority from Mr D to set up a new policy.

Mr D told us that one of the main reasons that he had asked for his existing policy to be re-instated was because he wanted to avoid the charges associated with setting up a new policy. He claimed that if he had known that a new policy was his only option, he would have shopped around.

He accepted that the firm had sent him a policy document quoting a new policy number, but he strenuously denied that he had been told he had a new policy. He said the firm's representative had told him that, for "administrative reasons", he had been allocated a new policy number. However, the representative had assured Mr D that he had been given an "updated plan linked to the existing policy", not a new policy.

We concluded that the representative had misrepresented the policy to Mr D. And we were not persuaded that Mr D would have taken out the policy had he known it was a new contract. We told the firm to refund, with interest, all the contributions that Mr D had made into the new policy.

FSAVC review - firm fails to offer reinstatement option when making redress

Mrs M, a primary school teacher in her mid-40s, consulted a financial adviser as she felt she ought to be doing more to save for her retirement. On the firm's advice, she left her employer's Additional Voluntary Contributions (AVC) scheme and took out a Free Standing Additional Voluntary Contributions (FSAVC) policy.

Over 5 years later, Mrs M found out, by chance, that she would almost certainly have been better off if she had not taken the firm's advice. After she complained to the firm, it agreed that the FSAVC policy had been mis-sold. It calculated her financial loss, based on a comparison between her FSAVC and her employer's AVC scheme, and then paid redress in the form of a lump sum added to her existing FSAVC.

Mrs M queried the way in which the firm had calculated her loss, as she was not convinced that it had used appropriate information. The firm failed to provide her with what she considered to be a satisfactory explanation, so she came to us.

complaint upheld
We considered that the firm had failed to act in accordance with the regulator's guidance. This was not because it had used inappropriate information when calculating Mrs M's loss, as she had thought. It was because the firm had failed to offer her the option of being reinstated in her employer's AVC scheme (providing the scheme was able to take her back).

We referred the firm to section 8.1.3 of the regulator's guidance for the review of FSAVC mis-selling. This states that firms should offer reinstatement, where this is available, if the AVC scheme was offered to employees as a "defined" benefit.

Walter Merricks, chief ombudsman

ombudsman news issue 41 [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.